Author Archives: Robert Mondo

While this week’s article wasn’t intended to be the third in a series, resolution of Aretha Franklin’s Estate merited examination, particularly because of the various Estate Planning issues raised both during the pendency of the proceeding and with its final resolution.

Aretha Franklin died on August 13, 2018, at age 76. At the time of her death, she was unmarried and had four sons, Clarence, Edward, Ted, and Kecalf. Aretha’s family believed that she died without any Will or Revocable Trust. In other words, she died intestate which meant that the laws of the state of her residence would determine distribution of her estate. Michigan laws required distribution of her estate equally among her sons, one of whom has special needs.

Aretha’s sons unanimously selected a cousin to serve as the estate’s personal representative, the individual responsible for distributing the late singer’s estate. While clearing out Aretha’s home, her niece found two different handwritten documents, portions of which were illegible, that expressed conflicting testamentary directions. Aretha failed to execute either of those documents with the requisite formalities for a Will, no one witnessed the creation of these “Wills,” and no attorney prepared the documents, although a notary signed one. An expert confirmed that all documents were in Aretha’s handwriting. In addition, one of her sons obtained a draft Will along with Aretha’s handwritten notes from a law firm Aretha allegedly had engaged to help her complete her Estate Planning and submitted those documents to the probate court.

A Michigan jury ended four years of family conflict when it decided what Aretha’s family could not – that a four-page handwritten document found in her couch represented her true testamentary intent regarding division and distribution of her estate. This case demonstrates clearly that truth is often stranger than fiction. The simplified recitation of the facts of Aretha’s case alone raises enough issues to qualify for a law school exam. First, it raises the issue of intestacy. Each state has a statutory scheme that governs distribution of the estate of a resident who dies intestate. Unfortunately, these laws disregard the needs of the individual recipients, including those who may have special circumstances, such as receiving governmental benefits. As noted above, one of Aretha’s sons has special needs. If the case had proceeded on an intestate basis, each son, including the one with special needs, would have received an equal ¼ portion of Aretha’s estate, outright. If the son with special needs were receiving government benefits, receipt of the inheritance would have disqualified him from those benefits. By determining that the document found constituted a Will, the jury helped Aretha’s sons avoid that result.

Probate represents yet another area of concern. If an individual dies with only a Will or without any Estate Planning documents, then that individual’s estate needs to go through probate. During the probate process, the executor or personal representative obtains the legal authority to distribute the decedent’s assets to the proper beneficiaries. Probate requires court oversight, costs money, and takes time. In addition, the probate process allows anyone, even those unrelated to the matter, to learn about the estate, its beneficiaries, and other facts that the family probably prefers to keep private. Most individuals who understand the probate process choose to avoid probate of their estate by creating and funding a Revocable Trust during their lifetime. The Revocable Trust contains provisions that direct a successor Trustee on how and under what circumstances to distribute the assets held in the Trust to the beneficiaries upon the death of the individual who created the Trust. The successor Trustee need not obtain permission from a judge before making these distributions, generally need not spend additional funds on the process, and usually can make distributions shortly after the death of the decedent, all while keeping private matters private. Unfortunately, Aretha’s family could not avoid probate because her assets were not in a Trust and would pass either pursuant to a Will or the laws of intestacy. Determining which “Will” would govern distribution of Aretha’s assets caused a four-year delay in receipt by her sons while subjecting them to public scrutiny of these private matters.

Finally, we see the problem of “holographic” or handwritten wills. A handful of states such as Alabama, Connecticut, Iowa, Washington, and Wisconsin refuse to recognize a holographic Will. Others like Florida, Illinois, Missouri, New Hampshire, and Wisconsin may accept a holographic Will if the document otherwise meets the statutory requirements for a valid Will, including witness and notary requirements, which seems to undermine the goal of creating a holographic Will. Thankfully, Aretha resided in Michigan, one of several states that recognizes holographic Wills. Of this majority of states, some require that the Testator write the entire document, while others, like Michigan: Section 700.2502 require that the Testator write only the substantive provisions dictating who receives what property.

Celebrity estates demonstrate the myriad of issues that arise when an individual fails to undertake Estate Planning or tries to complete this important task on their own. As this article has demonstrated, holographic Wills, along with any self-created document, complicates, rather than simplifies, an estate. It’s important to speak with a qualified Estate Planning attorney (Me!) regarding your Estate Plan and your unique circumstances. Had Aretha created a Revocable Trust, she would have given her family the privacy to work through their issues, even if they disagreed about the terms of the Revocable Trust. Save your family the time and expense that Aretha failed to save hers, and make sure that I guide you through the creation of your Estate Plan. Your family will have nothing but R-E-S-P-E-C-T for you when you do.

Mercifully, in my many years in private practice, I rarely, perhaps never, had cause to review the slayer statutes. After all, the only time that an attorney needs to review those statutes exists in tragic cases in which someone tries to derive a financial benefit from another person in whose death they may have played a role. I reviewed them in preparing this blog and found them adequate and oddly comforting. I remember being intrigued the first time I heard about Kouri Richins. She’s not a celebrity but her actions have garnered her some notoriety. Celebrity stories about a lack of proper Estate Planning and attorneys behaving badly make for great blogs. Both types of stories provide lessons for attorneys and clients alike. This story fits neither of those categories yet serves as a reminder of the importance of proper Estate Planning and underscores many of the lessons found in those stories.

Kouri Richins was married to Eric Richins and they had three children together. Eric died in 2022 and about a year after his death, Kouri authored a children’s book about grieving the loss of a loved one. In an interview that she gave in early 2023, Kouri said that she wrote the book to help her minor children cope with their father’s death. Shortly thereafter, authorities arrested Kouri in connection with her husband’s death. As of this writing, Kouri stands accused of murdering Eric by serving him a cocktail laced with a lethal dose of fentanyl. Prosecutors and Eric’s family have disclosed several unfavorable facts regarding Kouri’s behavior and it seems not only that she attempted to kill him several times before succeeding, but that she had a financial motive for killing her husband. It also seems that Eric long suspected her of trying to kill him. All of these facts underscore the opening sentence – one only reviews the slayer statutes in the most tragic of cases when someone tries to derive a financial profit from someone in whose death they played a role.

According to prosecutors, Kouri withdrew money from Eric’s bank accounts without his knowledge or permission. She tried to change the beneficiary designation on his life insurance policy to name herself as the sole beneficiary. According to allegations made in the civil lawsuit filed by Eric’s family, Kouri used his Property Power of Attorney to secure a $250,000 loan and repeatedly took checks from his business, using them for her own benefit. A forensic document examiner found evidence that Kouri forged some of Eric’s financial documents. Interestingly, Eric took steps during his life to protect himself from Kouri. He named someone else as his healthcare agent and asked his sister to serve as Trustee. It’s unclear whether Eric updated his Property Power of Attorney and named someone other than Kouri to act in that capacity and it’s unclear whether a Will or Trust governs distribution of Eric’s assets. Kouri and Eric signed a prenuptial agreement that left Eric’s business interest to Kouri if they were married at the time of his death, which provides the basis for Kouri’s lawsuit. The lawsuit alleges that Eric’s estate owes Kouri $3.6 million for the value of their family home, his business interests, and payments she made to maintain the home. Thankfully, Utah, like most other states, has statutes designed to prevent Kouri from profiting from Eric’s death.

Unfortunately, as is often the case, Utah’s “slayer statues” require that the murderer be found guilty of the crime by criminal standards (beyond a reasonable doubt), which are far higher than those required in civil court (a preponderance of the evidence). Utah’s statute, like most others, prevents a surviving spouse from receiving an intestate share, an elective share, a spouse’s share, a homestead allowance, exempt property, or a family allowance from their victim’s estate. Additionally, Utah’s statute prevents the killer from receiving property under a revocable instrument, such as a revocable trust, removes any general or limited power of appointment, disqualifies the killer from serving in any fiduciary capacity, and severs the interest of the decedent and killer in any joint tenancy property making it tenants in common property. The statute goes on to prevent the killer from profiting from the killer’s wrong in any way not already covered by the statute.

This article barely scratches the surface of a case that will continue to play out in public over the next several months. As stated in the beginning, it highlights the importance of keeping an Estate Plan updated. When things changed for Eric, he took steps to prevent Kouri from serving in fiduciary capacities and presumably, from inheriting assets from his estate. Unfortunately, Eric failed to go far enough and paid the ultimate price. The biggest tragedy of the story is that Kouri’s acts likely left her three children without either of their parents. Hopefully, Eric’s plan contained provisions nominating guardians to care for his children now that neither he nor Kouri can. That’s what a comprehensive Estate Plan does, plans for the unthinkable, solves problems that don’t yet exist, and gives peace of mind.

The step-up tax adjustment has been under siege for decades but has so far survived the onslaughts. The provision, which reduces capital gains tax for estates, has been controversial since the 1970s. Policymakers would still love to get their hands on the bonanza in tax revenues it represents.

There is a counterargument: If the law were repealed, assets held though multiple generations would suddenly become liable for substantial tax bills. Besides, imagine the misery of trawling through decades-old documentation to try to reconstitute transactions! In any case, the step-up basis is destined to remain a flashpoint for estate accounting.

How it works

The story begins in 1916, when federal estate tax law was adopted. (Before 1916, temporary death taxes were enacted to raise funds earmarked for special projects such as the formation of the Navy or underwriting the Civil War.) The step-up itself was introduced in 1921 for all types of assets, ranging from real estate to stocks and bonds. The purpose was to avoid double taxation on unrealized appreciation after assets had already been taxed once at fair market value.

The step-up serves as a valuation method of any asset after the owner dies. Essentially, it resets the cost basis for inherited assets, which is to say the original value of the asset, adjusted for commissions, expenses, depreciation, etc. The step-up propels that number forward to be assessed as of the day the owner dies. The intervening years, when the asset may have appreciated, no longer count in the calculation of capital gains tax. In reverse, if the asset has in fact lost value over this time period, the step-up would be negated.

Estates can employ several exceptions. Instead of using the date of death, the personal representatives can opt for a date six months later, assuming the later date reduces the estate’s tax bill. If they go that route, all property must be lumped together for valuation purposes. Representatives cannot select only the advantageous assets. The IRS is also mindful to circumvent tax-designed acquisitions, so the step-up is ruled out for any transfer from heir to owner enacted within a year of the owner’s death.

A costly loophole

Various administrations have struggled to close what they interpret as an elitist loophole, on the grounds that it disproportionately benefits larger estates. So far, they have not succeeded. Repeals advocated by presidents Clinton, Obama and Biden were all unsuccessful.

Fairness arguments aside, there is also a lot of money at stake for government coffers. According to the Congressional Budget Office, replacing the step-up with the original cost basis would generate about 110 billion over 10 years. The federal Joint Committee on Taxation likewise ascribes 42 billion of lost revenues to the step-up in 2021 alone.

The step-up was repealed in 1976, reinstated in 1980, and again challenged and reversed in 1980, in the wake of complaints about record-keeping for old transactions. Recently, opponents of the rule argue that the double taxation concern has lost its teeth when so few pay the federal estate tax anyhow now that the exemption is over 12 million. Opponents also cite revenue distortions. They claim that the step-up promotes a lock-in effect, whereby asset owners resist selling to avoid paying capital gains tax, hindering portfolio choice and liquidity

Watch out for changing legislation

As a beneficiary, you can use the step-up to minimize your capital gains costs in the estate. You might not even be the first in your family to do so. Successive heirs over many years could keep passing on a property, taking the step-up in each generation and paying little capital gains tax. Nevertheless, try to keep up to date with any new proposals for eliminating the tax break. Like so many other tax rules, step-up can get complicated. If you have an inheritance or are planning to leave one, be sure to call me to discuss the details.

My last post discussed the facts of the Diller v. Richardson No. A162139 (Cal. Ct. App. Mar. 17, 2022) case. As you will recall, the Estate Planning attorney who helped the Dillers draft their plan during life subsequently helped the surviving spouse, Sanford Diller, dismantle that plan shortly before Sanford’s death. Thomas Richardson served as the Estate Planning attorney for the Dillers during their lives. After Helen Diller died, Richardson penned a letter to Sanford Diller explaining how Sanford could achieve his Estate Planning goal of disinheriting his sons completely, notwithstanding that Sanford’s then-deceased wife’s plan was irrevocable. You may be wondering how the attorney could make such a promise. Interestingly, as the attorney who drafted the Estate Plan, he was aware of an escape hatch that he had built into the plan. He used that escape hatch to his client’s benefit. Neither of these acts on their own indicates any wrongdoing; however, as this second part of a two-part series will demonstrate, Richardson’s acts breached his fiduciary duties and ethical duties owed to his various clients.

Smartly, Richardson included a provision designed to allow extraordinary distributions of principal from the Marital Trust for Sanford’s benefit. In addition, Richardson included provisions in the Marital Trust that prohibited Sanford from making these distributions to himself. Notably, Sanford was serving as a co-Trustee of the Marital Trust. Instead, the trust agreement required a disinterested Trustee to make these additional principal distributions from the Marital Trust. In this situation, that made sense. Remember that the Marital Trust contained the vast majority of Helen’s $1.2 billion and although Helen and Sanford had marital strife, none of the facts suggest that Helen ever considered disinheriting Sanford. Until this point, Richardson behaved appropriately and exercised good judgment on behalf of his clients.

Not so smart was Richardson’s decision not only to serve as the “disinterested trustee” but also to fail to act in a disinterested manner. Richardson delivered a plan to Sanford whereby he would help Sanford deplete the principal of the Marital Trust by exercising the power of the disinterested trustee to make extraordinary distributions of principal. When a trust agreement gives the Trustee sole or absolute discretion, beneficiaries have a difficult time convincing a judge to compel a Trustee to make distributions because judges give great deference to the Trustee’s discretion. Richardson breached his various duties by exercising his discretion in such a way that disregarded the fiduciary duty that he owed to the remainder beneficiaries of the Marital Trust: Ronald and Bradley Diller. As a disinterested Trustee, he distributed all the principal of the Marital Trust to Sanford. Richardson knew that Sanford planned to disinherit his sons and acted as the instrumentality to allow him to do it. Ordinarily, that would not be enough to cause anyone to bat an eye, after all, attorneys help their clients disinherit their children every day. What makes Richardson’s acts egregious, however, is that as soon as Richardson agreed to serve as co-Trustee of the Marital Trust, he owed fiduciary duties to those same children he helped Sanford disinherit. Those fiduciary duties changed things and meant that Richardson had to consider not only Sanford but also Ronald and Bradley. Richardson could have resigned as co-Trustee or made smaller extraordinary distributions and arguably avoided this result. He chose neither of those options.

Richardson needn’t have done anything further to breach his duties as co-Trustee and his duty of loyalty to Helen as a former client. As you may have guessed, though, that’s not where the story ends. Richardson not only was instrumental in depriving Ronald and Bradley of their inheritance by depleting the Marital Trust, but after doing so, thwarted Ronald’s attempts to obtain information about the Marital Trust, Survivor’s Trust, and Family Trust and used the threat of a no-contest clause to deter Ronald from suing him. In fact, Richardson and his law firm took on nine conflicting roles ranging from serving as Helen and Sanford’s long-time Estate Planning attorneys, to serving as counsel for both Helen’s estate and Sanford’s estate, to acting as litigation attorneys to defendants in Ronald’s action. Thankfully, the judges in this and the related cases removed both Richardson and his firm from their fiduciary roles and barred them from serving as attorneys in the conflict.

As these articles demonstrate, Richardson behaved badly. Stories like this undermine the public trust in attorneys. Richardson breached the duties that he agreed to undertake both as a Trustee and as an attorney. Richardson gives all attorneys a bad name and he and his ilk contribute to the proliferation of lawyer jokes. They do little for the profession. Even more unfortunate for Richardson, regardless of his behavior before or after, most of his professional contacts will remember him for this. If you have doubts about your attorneys’ loyalty or the advice that they have provided, it’s time to talk to an experienced Estate Planning attorney who understands what it means to be a compassionate counselor and advisor. Guess who that Estate Planning attorney is. Me, Bob.

Through the years, I often commented that I serve as a counselor, sounding board and advisor for my clients. Clients call on me to fill many roles in addition to the ones for which they hire me. It’s a natural evolution of the attorney/client relationship. After all, clients trust me with their secrets, desires, and goals. I know the inner workings of their family, including who has creditor issues, who spends too much, who has health concerns, and who suffers from addiction. With my experience, I create Estate Plans with escape valves to address changes in the law and beneficiary circumstances because they understand the importance of flexibility in an Estate Plan. Change is inevitable and that they can best serve their clients by allowing the plan to evolve over time. This first part of a two-part series will detail the extensive facts of Diller v. Richardson, No. A162139 (Cal. Ct. App. Mar. 17, 2022), a case that highlights the many issues that arise when an attorney serves in one of these roles and disregards their duties as an officer of the court and as a fiduciary. The second part will explore what went wrong along with some of the safeguards that could have prevented litigation.

The Diller case has a long procedural history and several related cases beyond the scope of this article. The salient facts follow. Helen and Sanford Diller were married and had three children together: Ronald, Jackie, and Bradley. Ronald was close with his mother and Jackie was close with her father. The case makes clear that tension existed between the paired parent-child relationships and between Helen and Sanford themselves. The opinion makes no mention of whether Bradley was close to either parent, likely because he was not part of the litigation.

The Dillers created the “DNS Trust” in 1981 and amended it several times over the years. Ultimately the Dillers created the Sixteenth Amendment and Complete Restatement of the DNS Trust which was at issue in the litigation that ensued after the death of both Helen and Sanford. The Dillers’ Estate Planning attorney, Thomas Richardson, drafted a document that created four sub-trusts upon the death of the first spouse: a Marital Trust, a Survivor’s Trust, a Family Trust, and a reverse QTIP Marital Trust. The DNS Trust included a provision that allowed the surviving spouse to appoint a co-trustee of the Marital Trust of which that surviving spouse was serving as Trustee.

Helen died first in 2015. Ronald testified that his mother, Helen, intended to leave a legacy for her family, meaning that some portion of her estate would pass to her children and grandchildren. While his father was alive, Ronald did not seek copies of any of the estate planning documents, nor was he provided with any. It was his understanding that after his father, Sanford, died, he would receive his inheritance but that in the interim assets would be held in irrevocable trusts for Sanford’s lifetime benefit. Shortly after Helen’s death, Sanford decided that he was unhappy with the plan that Helen and he had established and sought to change it by disinheriting his sons, Ronald and Bradley. Every day surviving spouses decide that they do not like the plan to which they had agreed while the now deceased spouse was alive and seek to change it. Usually, the surviving spouse has the option to change only the portion of the plan relating to their own assets, or the Survivor’s Trust. Usually, the surviving spouse cannot change the terms of the Family Trust and almost never can they change the terms of a Marital Trust. The Diller case proves the exception to these rules.

The terms of the Marital Trust called for distributions of all net income to Sanford, along with distributions of principal for his health, education, maintenance, and support, in his accustomed manner of living. Finally, the Marital Trust contained a provision that allowed distribution of additional principal as the Trustee, excluding any Interested Trustee, may from time to time determine. The Trust Agreement carefully defined an Interested Trustee as anyone who was a current or future beneficiary of income or principal of the DNS Trust. Remember that Sanford had the power to appoint a co-Trustee for the Marital Trust. He appointed the Estate Planning attorney that he and Helen had used during Helen’s life, Thomas Richardson. Richardson qualified as a disinterested trustee under the terms of the trust agreement and having drafted the trust agreement arguably knew and understood the intentions of both parties better than any other individual.

In response to Sanford’s request to make changes to the DNS Trust, Richardson wrote a letter to Sandford indicating that the Marital Trust and Family Trust were irrevocable because of Helen’s death. He reminded Sanford that he had the power to amend only the Survivor’s Trust. Richardson went on to propose to Sanford that he, as the disinterested Trustee of the Marital Trust, could distribute all assets of the Marital Trust to Sanford as beneficiary thereby allowing Sanford to do indirectly what he could not do directly – make changes to the Marital Trust by depleting it and putting the assets in the Survivor’s Trust. It’s difficult to understand why the attorney who drafted the plan would put in writing the way by which he was going to help the surviving spouse defeat the plan. Yet, that’s exactly what Richardson did.

Richardson transferred the entire principal amount of the Marital Trust totaling over $1.2 billion to Sanford, notwithstanding that Sanford already had $1.2 billion of his own money. This obliterated Helen’s Estate Plan and Richardson absolutely knew and understood that. It seems clear that Richardson breached the duty of loyalty and impartiality that he owed to the remainder beneficiaries of the Marital Trust created under the DNS Trust, Ronald, and Bradley, among other things. Let’s not forget that Richardson created Helen’s Estate Plan and represented her during her life and arguably owed her some duties as well.

After receiving all assets from the Marital Trust, Sanford transferred those assets to his Survivor’s Trust and disinherited his sons, Ronald and Bradley. Sanford died thereafter in 2018. After Sanford’s death, Ronald sought information regarding the plan and his inheritance. Richardson, or members of his law firm, advised Ronald that he was the beneficiary of a trust containing $3 million of which Richardson was the sole Trustee and for which distributions would be made to Ronald for medical emergencies and financial exigencies only, as determined by Richardson in his capacity as Trustee. Ronald sought copies of all his parents’ Estate Planning documents, including the DNS Trust. Richardson’s law firm denied that request and actively discouraged Ronald from seeking copies of the documents by reminding him of the no-contest clause in the documents. Shortly thereafter, Ronald initiated a lawsuit against his sister, Jackie, who was serving as the Trustee of the Survivor’s Trust.

In the interest of brevity, this article ignores the procedural posture of the case, but read it because it’s fascinating. The next article in this series will detail how the Estate Planning attorney used a provision that he inserted to protect the plan to undermine Helen’s plan and deprive Bradley and Ronald of approximately $400,000,000 each and explore the numerous ways in which the attorney was the worst actor in all of this – stay tuned!

Ah, summer…it’s here! The time for barbeques, baseball, beaches, and … Internal Revenue Code (the “Code”) Section 529 plans (“529 plans”)? Yes! As we enjoy the lazy days of summer (spring), let’s get a jump start on thinking about the new school year, which means now’s the perfect time to look at your Estate Plan, especially as it relates to educational goals for your children, grandchildren, and other loved ones. As they say, it’s never too early to start planning. A 529 plan, otherwise known as a Qualified Tuition Program (“QTP”) offers a tax-sheltered way to save for education expenses. State agencies and educational institutions sponsor 529 plans and each sets its own plan requirements within the federal framework. For a helpful guide to the various 529 plans.

529 plans come in two varieties. The first is a prepaid tuition plan that allows the owner to lock in tuition rates at eligible public and private universities and colleges. Most states guarantee that the funds in the plan will keep pace with tuition. Most of these plans do not offer a way to cover other types of expenses, such as room and board, and generally require the beneficiary to reside in the state in which the donor establishes the plan. The other variety of 529 plans, the savings plan, addresses these issues. The savings plan allows the donor to save for qualified education expenses, including tuition, room, board, textbooks, and even computers (if required by the school). The 529 savings plan may represent the “Holy Grail” of Estate Planning as this article explains.

Although a contribution to a 529 plan does not produce an income tax deduction at the federal level, it may qualify for a state income tax deduction. Depending upon the plan chosen, 529 plans offer flexibility in allowing the donor to choose investments. The Code imposes no tax upon the income earned by the 529 plan. In fact, the income may never be subject to tax, depending upon the distribution of the income from the plan. Distributions from the 529 plan used for the beneficiary’s qualified education expenses for students at colleges, junior colleges, technical schools, and even at primary and secondary schools (up to $10,000 per year) do not have income tax consequences for the beneficiary or anyone else. If the donor uses the distributions from the 529 plan for something other than education expenses the earnings become taxable and could be subject to a 10% penalty.

Second, contributions to a 529 plan may qualify for the gift tax annual exclusion ($17,000 per year per person in 2023). In fact, an individual may utilize up to 5 years of annual exclusions up front in funding the plan. That benefit comes with a price in that if the donor dies within 5 years of funding the plan, the Code includes the value of the annual exclusions for the years into which the donor did not survive in the donor’s taxable estate. Thus, if the donor contributed $85,000 ($17,000 * 5) to the plan in 2023 and then died in 2026, the Code includes $17,000 ($85,000 – ($17,000 * 4 = $68,000)) in the donor’s taxable estate. Regardless of the date of death, any growth in the funds stays out of the donor’s taxable estate.

Typically, if a donor retains control over assets, the Code includes the value of those assets in the donor’s taxable estate. A 529 plan offers a unique benefit in this respect because the donor of the 529 plan maintains control of the plan by retaining the ability to change beneficiaries, choose investments, and make distributions, yet the Code excludes the value of the assets in the plan from the donor’s taxable estate upon death. However, this power in the owner cuts both ways. The successor owner has the same powers and could direct the funds away from the intended beneficiary. If the donor wanted to restrict the successor owner from redirecting the funds for their own benefit or for the benefit of another beneficiary, the owner could use a trust to hold the 529 plan. Of note, structuring the 529 plan in this manner restricts the beneficiary to use one annual exclusion, rather than the 5 that an individual owner could otherwise use to fund the plan upfront.

A donor contributing to a 529 plan receives yet another bonus in the form of bankruptcy protection. If the debtor files for bankruptcy and has made contributions to a 529 plan, the funds will remain protected if the plan meets certain requirements: (1) the donor contributed the funds at least two years prior to filing for bankruptcy; (2) the donor established the 529 plan for the donor’s children, grandchildren, step-children, or step-grandchildren; and (3) the donor’s contributions do not exceed the 529 plan’s maximum contribution limit per beneficiary (which can be in excess of $500,000). Here again, the 529 plan allows the donor to retain control yet protects the plan in a bankruptcy proceeding. The 529 is an asset like no other.

Finally, SECURE 2.0 passed at the end of 2022 provides yet another benefit for taxpayers with 529 plans. Now those taxpayers will be able to use funds for something other than qualified education expenses without income tax consequences. The Act allows taxpayers to convert up to $35,000 from a 529 Plan to an IRA. The Act imposes several restrictions on the 529 Plans allowed to take advantage of this rollover as follows: the Plan must have been maintained for 15 years prior to the rollover, the amount converted for a year cannot exceed the aggregate amount contributed to the 529 Plan in the 5 years prior to the rollover, the amount must move directly from the 529 Plan to the IRA, and the amount, when added to any other IRA contribution cannot exceed the contribution limit in effect for that year. This provision becomes effective for 529 Plan distributions after December 31, 2023.

To summarize, 529 plans have several benefits: (1) contributions to the plan may qualify for deductions at the state level, (2) earnings on the investments accrue income tax free as long as the funds are used for qualified education expenses, (3) most colleges and universities in the United States accept the funds for a variety of expenses, including tuition, fees, room, board, and textbooks, (4) 529 plans have high contribution limits allowing a donor to help establish a significant education fund for the beneficiary, (5) the annual per donee exclusion amount covers contributions to the plan making it possible in 2023 to contribute up to $17,000 on behalf of each beneficiary without worrying about incurring gift taxes or using Applicable Exclusion Amounts and these gifts can be front-loaded for up to 5 years at the outset, (6) the account owner retains control over the funds in the 529 plan allowing the donor to control investments and the timing of distributions, and (7) the grantor may roll extra funds in the 529 over to a Roth IRA for the benefit of the beneficiary. As this article makes clear, 529 may represent the “Holy Grail” in Estate Planning.

I often focus on Revocable Trusts and the flexibility, continuity, and protections that they provide. Of course, in addition to the foregoing benefits, trusts avoid the probate process, which can be lengthy and expensive in some states. While extolling the virtue of an Estate Plan based upon a Revocable Trust, I often explain that Wills play an important role in a comprehensive Estate Plan. I have vivid recollections of sitting across from numerous clients who asked me the question “If I have a Revocable Trust, why do I need a Will?”

Let’s start with the basics. If an individual dies without a Revocable Trust or Will, that’s referred to as dying intestate. Dying intestate occurs often enough that Illinois has created statutes to address the issue. These statutes determine distribution of your assets without any input from you or your loved ones. Many states’ intestacy laws give only a portion of assets to the surviving spouse and give the remainder to descendants, without regard for the specific needs of the individual recipients. This includes those who may have special circumstances, such as receiving needs-based governmental benefits. If you die intestate, then your estate will need to go through probate. An individual will petition a court for appointment as executor, personal representative, or administrator, which will give that individual legal authority to collect and distribute your assets. That individual likely will need to retain an attorney to understand and navigate the complex court system. A judge oversees the many steps involved in this public probate process. As the probate process is public, otherwise private information about the nature and extent of the individual’s assets and to whom they are being left would be divulged. This could allow nosy neighbors, predators, and others to pry into the lives of the individual and their loved ones.

Revocable Trusts provide the solution to the probate issue. They allow the family to forego the probate process altogether. The Trustor creates a Revocable Trust and appoints a Trustee to step into their shoes upon their death and administer the trust without court intervention. In this way, properly funded Revocable Trusts avoid probate. If, however, the decedent died with one asset titled in his or her individual name that asset needs to pass through probate. Here’s the first reason that even if you have a Revocable Trust, you need a Will. Despite the best efforts of the client and the attorney who drafted the Estate Plan, assets sometimes remain titled in the name of the Grantor (the person setting up the Trust) at death. In most states, the only way to ensure that these assets end up in the Revocable Trust is through the “Pour-over Will” that “pours” any assets passing through probate “over” to the trust. The Will acts as a backstop to the Revocable Trust. In addition, in the rare circumstance that the Revocable Trust is declared invalid, the Will can include provisions that direct passage of the assets in the same manner as was directed by the Revocable Trust.

Second, certain states allow their residents to pass tangible personal property through a separate writing without the formalities required of a Will. These documents need to follow state statutes concerning requirements for validity, but generally, these documents need only reference the tangible personal property sought to be distributed, the desired recipient of the property, and have the testator’s )the deceased person) signature along with the date signed. Usually, states that allow a separate writing require that the Will contain a direction regarding passing the tangible personal property according to such document. These states typically do not have companion statutes that allow a Revocable Trust to reference the memorandum.

Remember, most of the time, the Revocable Trust represents the gold-standard in Estate Planning. They contain flexibility, provide for continuity, avoid probate, and allow the Trustor to include protections and/or restrictions for their beneficiaries. It’s rarely, maybe never, wrong to create a Revocable Trust. Of course, the Trustor needs to ensure that they fund the Trust, otherwise, the assets pass through probate in accordance with the Will; however, that doesn’t negate the importance of the Will. As this article has demonstrated, Wills play an important role in a comprehensive Estate Plan.  A Will serves as the sole legal document to accomplish certain things and failing all else, the Will serves as a backstop to the Revocable Trust.

As an Estate Planning practitioner, I always considers the impact that estate, gift, generation-skipping transfer, and inheritance taxes will have on an Estate Plan. After all, clients frequently inquire about tax impact during consultation and beneficiaries usually wonder not only if taxes will result from their inheritance but also who will bear the burden of paying said taxes. Generally, the individual making the gift bears the responsibility of paying any taxes on the transfer during life or at death. The first part in this two-part series Understanding and Manipulating Estate and Gift Taxes focused on understanding the basics of the Estate and Gift Tax. This second part will explore one sanctioned way to manipulate the Estate and Gift Tax.

The Internal Revenue Code (“Code”) levies an estate tax on the value of the assets of an estate exceeding the Applicable Exclusion Amount (“AEA”) at the rate of 40%. In 2023, each U.S. citizen / resident has an AEA of $12.92 million, meaning that an individual can transfer up to $12.92 million either during life or at death without worrying about incurring a gift or estate tax on the transfer. For those whose estates exceed the AEA, Code Section 2056 offers relief in the form of an unlimited deduction for property other than terminable interest property passing to the surviving spouse. Again, the Code provides a save for even terminable interest property if it meets the requirements of Code Section 2056(b)(7) – the “Qualified Terminable Interest Property” (“QTIP”) Trust. To receive the unlimited marital deduction for property passing to a surviving spouse through a properly structured QTIP Trust, the decedent’s fiduciary needs to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and elect QTIP treatment thereon. That election comes at a price though because it forces inclusion of the value of the QTIP Trust in the surviving spouse’s estate at the surviving spouse’s death, pursuant to Code Section 2044.

The surviving spouse’s estate bears the burden of paying tax on those assets, notwithstanding that the surviving spouse cannot control ultimate disposition of those assets. The decedent spouse can decide what happens to those assets upon the death of the surviving spouse. Further, the QTIP Trust need not include any distributions of principal to the surviving spouse, yet the Code includes that principal amount in the surviving spouse’s estate. Thankfully, the Code contains some balance. Code Section 2207A allows the decedent spouse’s estate the right to recover the amount by which inclusion of the QTIP Trust in the surviving spouse’s estate increased the total taxes due on the surviving spouse’s estate.

Let’s return to our example from last week. If you recall, Howard and Bernadette each had an estate of $25 million. Howard structured his plan to create a Family Trust with his remaining AEA, let’s assume that it was $12.92 million because he died in 2023 with his AEA intact. The remainder ($12.08 million) went into a Marital Trust for Bernie’s benefit. Let’s change the facts such that Bernie’s trust qualified for the QTIP election, thereby resulting in no taxes due upon Howard’s death. Now, let’s assume that Bernadette dies in 2023 without having used any of her AEA. She, too, has $12.92 million that she can shield from estate taxes. The $12.08 million remainder of her estate will be subject to tax at a rate of 40%, resulting in a tax liability of $4,832,000 ($12.08 *.40) …but wait! We forgot to include the principal of the QTIP Trust in our calculation of tax for Bernadette’s estate. Thus, Bernie’s estate would total $24.16 million ($25 million plus $12.08 million QTIP less $12.92 AEA) resulting in a total tax liability of $9,664,000 ($24.16 * .40). Not such a great result for her beneficiaries since they will not benefit from the assets in the QTIP Trust. Code Section 2207A, however, changes that result and allows Bernadette’s estate to recover the $4,832,000 amount by which the taxes increased because of inclusion of the value of the QTIP Trust in her estate. Thus, Bernie’s beneficiaries do not bear the burden of taxes on property from which they do not benefit and her estate recovers from the person or persons receiving the property that was included in Bernadette’s estate. This right to recover provides a more equitable result for Bernie’s beneficiaries who are in the same position as if Bernie never benefitted from the QTIP Trust.

Treasury Regulation Section 20.2207A-1(a)(1) explains that the recovery is from the “person receiving the property.” Thus, in our example, if Howard’s kids, Halley and Neil, received the QTIP Trust upon Bernie’s death, Bernadette’s estate could recover from the children. Let’s change the facts such that Halley and Neil were the children of both Howard and Bernadette. In that case, perhaps Bernadette’s fiduciary has no concerns about recovery because the beneficiaries are the same. Code Section 2207A(a)(2) allows a waiver of the right of recovery in either the Will or the Trust of the surviving spouse. This waiver allows the surviving spouse to determine whether their estate should recover any resulting taxes or whether the estate should forego such recovery.

If the beneficiaries of the QTIP Trust are the same as the surviving spouse’s beneficiaries, it’s more tax efficient for the surviving spouse to waive the right of recovery. If the statute of limitations for the estate to recover from the beneficiaries based upon the surviving spouse’s estate’s statutory rights under Code Section 2207A expires, then that results in a gift, likely unintended.  

After that title, who doesn’t want to read this post? Any practitioner in the Estate Planning world considers the impact that estate, gift, generation-skipping transfer, and inheritance taxes will have on a plan. Clients inquire about tax impact during consultation and beneficiaries wonder not only if taxes will result from their inheritance but also who will bear the burden of paying said taxes. Generally, the individual making the gift bears the responsibility of paying any taxes on the transfer during life or at death. Certain provisions of the Code may change that result. This first part in a two-part series will focus on understanding the basics of the Estate and Gift Tax.

Let’s start with the basics. The Internal Revenue Code (“Code”) levies an estate tax on the value of the assets of an estate that exceed the Applicable Exclusion Amount (“AEA”) at the rate of 40%. In 2023, each U.S. citizen / resident has an AEA of $12.92 million, meaning that an individual can transfer up to $12.92 million either during life or at death without worrying about incurring a tax on the transfer. For most of the population, that’s enough to remove the worry of estate tax from their mind. For some of the population, however, that’s not enough. Thankfully, in addition to the AEA, Section 2056 of the Code provides an unlimited deduction for property passing to the surviving spouse. Thus, married individuals may pass an unlimited amount of assets between one another during life and at death. Section 2056(b)(1) prohibits the deduction, however, for property passing to the surviving spouse that qualifies as a “terminable interest” meaning that the spouse’s interest in the property will terminate or fail on the lapse of time or occurrence of an event or contingency, or will terminate upon the failure of an event or contingency to occur, and upon such termination the interest will pass to someone other than the surviving spouse.

You may be wondering what that means. Let’s review an example. Assume that Howard and Bernadette have been married for several years but have no children together. Howard has children from a prior relationship, Halley and Neil. Over the years as an astronaut, Howard has amassed an estate of $25 million. Bernadette has her own assets of $25 million from her successful job as a microbiologist at a pharmaceutical company. Howard and Bernadette live a lavish lifestyle, flying all over the world to visit their friends, Sheldon and Amy, now living in Switzerland, along with their friend, Raj, and his wife Riva, living in India. After his death, Howard wants to make sure that Bernadette can continue this lifestyle but also wants to ensure that his children have adequate funds as well. He wants to pay as little as possible in taxes but worries that if he gives Bernadette everything outright that she will spend it all or fail to leave his children any of his wealth.

With these competing interests in mind, Howard makes an appointment to see his attorney who suggests that he structure his estate plan to create a Family Trust that will consist of his unused AEA with the remainder going into a Marital Trust for Bernadette’s benefit. The terms of the marital trust allow the Trustee of the Trust to make distributions of income or principal for Bernadette for life for her health, education, maintenance, and support. Howard does not want Bernadette to alter the plan and therefore excludes both a limited power of appointment and a general power of appointment. At Bernadette’s death, the assets in the marital trust will pass to his children, Halley and Neil. Howard likes the plan and signs it.

A few months later, Howard dies unexpectedly. Bernadette sees her attorney who advises her that Howard’s attorney structured the plan improperly. Howard’s estate cannot avail itself of the unlimited marital deduction for the assets passing to her in the marital trust. The attorney explains that Bernadette’s marital trust consists of a terminable interest, but an inappropriately structured terminable interest. He indicates that the Code allows a decedent spouse to leave assets in a trust for the benefit of a surviving spouse during that spouse’s life and obtain the benefit of the unlimited marital deduction provided that said trust has been properly structured and that Bernie’s trust was not. The lawyer goes on to advise Bernadette that two types of marital trusts will produce an unlimited marital deduction. The first is one in which the surviving spouse has a life estate coupled with a general power of appointment. While Bernie’s marital trust gave her a life estate, it did not contain a general power of appointment. The second is a trust that meets the requirements set forth in Code Section 2056(b)(7).

Code Section 2056(b)(7) requires the trustee to distribute all income from the trust to the surviving spouse. In addition, the trust gives the surviving spouse the power to make any unproductive property income-producing. Finally, no payment may be made to any other person during the surviving spouse’s lifetime. If the trust meets these requirements, it will qualify as a “Qualified Terminable Interest Property” (“QTIP”) Trust and allow the decedent spouse’s estate an unlimited marital deduction for the assets passing to the trust. The decedent spouse’s fiduciary need only file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and elect QTIP treatment thereon, and that forces inclusion of the value of the QTIP Trust at the surviving spouse’s death in the surviving spouse’s estate, pursuant to Code Section 2044.

The surviving spouse’s estate bears the burden of paying tax on assets that the surviving spouse cannot control. In fact, the surviving spouse may have never had the benefit of any distribution of principal, yet it’s the principal amount included in that surviving spouse’s estate. This realization undoubtedly has frustrated many a surviving spouse. Adding insult to injury, the decedent spouse controls disposition of the assets upon the death of the surviving spouse. Talk about a homerun for the decedent spouse and a recipe for a tense relationship between the surviving spouse and the stepchildren. If only there were a solution… we should be shouting “Code Section 2207A.” It provides relief to the surviving spouse’s estate.

Many of us dream about suddenly inheriting assets from a long-lost uncle. No doubt, some have experienced that new-found wealth and were overjoyed when it occurred. Sometimes, however, that wealth may not be desirable. Some clients have assets that exceed the amount they could spend in their lifetime, will have an estate tax issue, and additional assets only compound that. Others may prefer that the assets go elsewhere. This article examines the basics of disclaimers and how some situations require the more complex “double disclaimer.”

Internal Revenue Code (“Code”) Section 2518 describes the requirements necessary for a “qualified disclaimer.” If the disclaimer meets the statutory requirements, then the Code treats the disclaimant as having predeceased the decedent and imposes no gift tax on the transfer to the second beneficiary. This preserves the disclaimant’s Applicable Exclusion Amount (“AEA”) and the assets pass to the next named beneficiary or beneficiaries without additional tax liability. For the disclaimer to work; however, the disclaimant needs to follow the rules of Code Section 2518 precisely. A disclaimer needs to meet the following requirements pursuant to Code Section 2518:

1. The refusal must be in writing,
2. The refusal must be received by the transferor of the interest (or the representative or legal title holder) within 9 months of the later of the date on which the transfer creating the interest is made or the date the recipient attains age 21,
3. The disclaimant must not have accepted any of the benefits of the property, and
4. The interest must pass without direction by the disclaimant either to the decedent’s spouse or someone other than the disclaimant.

Nothing in the Code, the Treasury Regulations, nor any Internal Revenue Service guidance allows an extension on the 9-month deadline for a disclaimer. It matters not if the disclaimant were sick or had extenuating circumstances. That deadline is firm. Further, it doesn’t matter if an individual doesn’t know about their interest in the assets until well beyond the 9-month timeline. A lack of knowledge changes nothing. Let’s look at a quick example:

Granny’s Will leaves Blackare to Jose. The Will provides that if Jose predeceases Granny, Blackacre goes to Jose’s daughter, Lola. Blackacre has a value of $5 million. Jose has sufficient assets from his vast holdings and does not need  Blackacre. Jose has made several lifetime gifts and has already used his AEA. He wants Blackacre to go to Lola because she has always enjoyed vacationing there. If Jose accepts Blackacre, then gives it to Lola, that results in a taxable gift on $5 million resulting in a gift tax liability of $2 million. If Jose disclaims timely without accepting any benefits from Blackacre, then Blackacre will pass to Lola as though Jose predeceased Granny. Granny’s Will provides that Blackacre passes to Lola if Jose predeceased Granny. Allowing Blackacre to pass in this manner accomplishes Jose’s wishes and saves Jose $2 million.

While the above example is simple, that’s not always the case. If you want to consider a disclaimer, you need to map out how the property will pass after the disclaimer. The Estate Planning documents may complicate that process and the disclaimant cannot direct what happens if the Estate Plan varies from the disclaimant’s wishes. For example, above, if Jose preferred that Blackacre pass to his daughter, Gabriela, rather than to Lola, he could not disclaim and direct that the property pass to Gabriela. That would violate Code Section 2518. Instead, he would need to accept Blackacre and then gift it to Gabriela. He would incur the resulting gift tax of $2 million. In some complex situations, it may still be possible to achieve the desired result. Executing a disclaimer requires you to understand how the property will pass after the disclaimer. A double disclaimer may allow you to alter the course a bit. Let’s look at another example that highlights that principle:

Grandpa had a trust that left all his assets to his surviving spouse, Granny. Pursuant to the terms of Grandpa’s Trust, if Granny disclaimed, the property would be held in a Family or Bypass Trust for the benefit of Granny and their children, Lucia and Jose. At Granny’s death, the Trust Agreement directs distribution of the assets outright to Lucia and Jose. If Lucia or Jose predeceases Granny, the property would go to their descendants, if any, or to Grandpa’s descendants.

Granny decides she doesn’t want Blackacre and wants it to go to their children immediately without using any of her AEA. First, Granny needs to execute a qualified disclaimer of the property. That disclaimer sends Blackacre to the Bypass or Family Trust for her benefit and the benefit of Lucia and Jose. (Remember, even though Granny would benefit from the Bypass Trust, this meets the requirements of a qualified disclaimer because she is the decedent’s spouse.) Next, Granny would execute another qualified disclaimer, this time of her interest in the Bypass Trust. The second disclaimer treats Granny as having predeceased Grandpa. This allows Blackacre to pass directly to Lucia and Jose. In fact, if desired, the family could go one step further. Let’s say Granny only wanted Lucia to get Blackacre and Jose agreed to that plan. After Granny executed the first disclaimer sending Blackacre to the Bypass Trust and the second disclaimer of her interest in the Bypass Trust, Jose could disclaim his interest. Since Jose has no children, the terms of the trust would send Blackacre to Lucia. Remember, it’s imperative to chart the course of the disclaimed property to know where it will go.

Of course, if Granny wants to get the property just to Lucia, she’d have to rely on the expectation that Jose will disclaim after Granny does. Jose would be under no legal obligation to do so.

Disclaimers represent yet another way to achieve client goals. Sometimes they can be quite tricky and require thought to achieve the desired outcome. Sometimes more than one disclaimer might be necessary to accomplish the preferred result. Remember to chart the post-disclaimer course of the asset prior to disclaiming. Once you are confident that the disclaimed property will pass as intended, it’s imperative to follow Code Section 2518 exactly. Even a small misstep will invalidate the disclaimer and make the transfer a gift.