Author Archives: Robert Mondo

As a practitioner who assists executors with completing and filing the Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return (“Form 706”), Internal Revenue Code (“Code”) Section 2051 defines the taxable estate as the value of the gross estate less deductions taken under Code Sections 2053-2058.  Section 2053 deals with deductions for funeral expenses, administration expenses, claims against the estate, and unpaid mortgages, or any indebtedness in respect of, property includible in the value of the decedent’s gross estate.  The Internal Revenue Service (“IRS”) published final regulations for Code Section 2053 in 2009 (“2009 Regulations”) limiting the deduction for claims and expenses to the amounts actually paid in settlement or satisfaction of the item, with exceptions for ascertainable amounts, claims against the estate, and indebtedness.  The 2009 Regulations contained reservations for future guidance on the application of present-value principles in determining the amount of the deduction under Code Section 2053.  Among other items that include guidance on the deductibility of interest expense accruing on tax and penalties the estate owes, interest and expense accrued on certain loan obligations incurred by the estate, and amounts paid under a decedent’s personal guarantee, the recently promulgated proposed regulations (REG-130975-08) address proper use of present-value principles in determining the amount that an estate may deduct for funeral expenses, administration expenses, and certain claims.

The preamble to the proposed regulations makes clear that they sought to address the issue of the proper amount deductible under IRC 2053, especially in situations when the estate pays the obligation over time.  According to Section 20.2053-3(d)(2) of the proposed regulations, interest on a loan entered into by an estate to facilitate payment of the estate’s tax or the administration of the estate may be deductible if the following are true:  (1) the interest expense arises from an instrument or contractual arrangement that constitutes indebtedness under the applicable income tax regulations and principles of federal law; (2) the interest expense and loan are “bona fide in nature bases on all the facts and circumstances” and (3) the loan terms are “actually and necessarily incurred in the administration of the decedent’s estate.” The proposed regulations then expand on these concepts by including a list of eleven non-inclusive factors that collectively may support a finding that the requirements have been satisfied.

The preamble to the proposed regulations explains that estates often need additional time to pay every deductible claim and expense, but that most pay nearly all their ordinary expenses within the three-year period immediately following the decedent’s date of death, and thereby “strikes an appropriate balance between benefits and burdens” by setting the time during which the estate may deduct the entire value of a claim at three years.  The proposed regulations amend the 2009 Regulations and require the estate to discount to present value amounts paid after the third anniversary of the decedent’s death and refer to that time from the date of death to the third anniversary as the “grace period.”  While the proposed regulations make sense and may provide a more economically accurate deduction, they substantially undercut a previously significant payment tool for illiquid estates:  the Graegin note.

The Graegin note was named after the case in which it was first recognized as valid, Estate of Graegin v. Commissioner, T.C. Memo 1988-477.  A Graegin loan has a set interest rate, the taxpayer may elect a fixed term of years, and the note prohibits prepayment of principal or interest.  Because of the fixed and determinable amount of the interest payment, the Graegin Court and numerous other cases that followed allowed a dollar-for-dollar estate tax deduction for the payment of interest, including future interest.  There was no limit on the term of the note which meant that the estate could receive an upfront deduction for interest that it wasn’t going to pay for several years.  This technique allowed executors of estates faced with a liquidity problem to use a properly structured Graegin note to borrow the cash necessary to pay the estate tax or otherwise administer the estate.  The technique usually also had the added benefits of allowing the family to keep more assets, eliminating a fire sale to raise funds quickly, and reducing the size of the taxable estate.

Prior to the proposed regulations, the power of using a Graegin note was that the estate could deduct the full amount, dollar-for-dollar of the interest paid in the future over the term of the loan on Form 706; no present-value reduction was necessary.  For example, if an estate borrowed $10 million at 5% interest on a 10-year note, the estate could structure the loan to defer all principal payments and interest until year 10 at which time the estate would make a balloon payment.  On Form 706 the estate could deduct that $5 million future interest payment ($10 million borrowed * .05 interest rate * 10 years), thereby further reducing the taxable estate and saving the estate an additional $2 million ($5 million * .40 tax rate).  In many ways, the Graegin loan was a home run.  Of course, the transaction had to have economic substance which included documenting the estate’s need for liquidity, providing detail regarding the structure of the note, calculating the interest due, and confirming that the note conformed to market standards.

While these proposed regulations have yet to become final, it seems that the Graegin note is destined to go the way of Blockbuster video stores.  The present value and interest limitations contained in the proposed regulations restrict the amount deductible under a Graegin arrangement, if allowed at all.  There may a small window during which the estates can continue to benefit from the use of a Graegin structure, but it’s closing fast.  Note that the proposed regulations will apply to the estates of decedents dying on or after the date the final regulations are published in the Federal Register.

Few baby boomers are prepared for their own funerals. Even though humans have a 100% mortality rate, less than 30% of adults do advance funeral planning. But here’s a secret: you don’t have to spend your children’s inheritance on a funeral. Here are some helpful tips about advanced funeral planning.

I’m always encouraging people to plan for this guaranteed inevitability. While I had put my wishes on file with a funeral home and got a price quote back in 2015, I didn’t pay for those arrangements at the time. In 2022, I finally decided to go ahead with finalizing and paying for my cremation.

What do you need to know before you go to a funeral home to pre-plan for your own eventual demise? We’ll cover these three tips …

Tip #1 – Know Your Preferences
Tip #2 – Preplanning Isn’t the Same as Prepaying

Tip #3 – You Don’t Have to Pay Everything Upfront

Tip #1 – Know Your Preferences

Before going to plan your arrangements, be educated about what you want and how to get it! If you want green burial or an outside-the-box send-off, be prepared to advocate for your choices.

Do your research before visiting the funeral home!

Tip #2 – Preplanning Isn’t the Same as Prepaying

You can put your vital information and choices on file with a funeral and not prepay. It’s good to have the details for a death certificate and your choices already noted. As a preneed salesperson pointed out to me, however, the cost of goods and services will increase over the years.

If you prepay with an insurance policy, it guarantees and “locks in” today’s prices for the costs that the funeral home controls. This includes their service fees, casket and embalming costs, memorial printing packages, and so forth. However, outside costs like obituaries, motorcycle escorts for funeral processions, and taxes are not guaranteed. Those will continue to go up.

When the funeral plans are finalized, tweaks made to the plans can result in money being returned to the family, or more money may need to be paid.

Tip #3 – You Don’t Have to Pay Everything Upfront

When you make funeral arrangements in advance, in most states, you don’t give your money directly to the funeral home. You buy an insurance policy that you own, with the funeral home as the beneficiary. Some states have funeral trust funds to keep consumers’ money safe. With insurance or a trust fund, if the funeral home goes out of business or is sold to another company, don’t lose your money.

When making preneed financing arrangements with insurance, you may be offered payment options, stretching from three to 20 years. If you are healthy and die before paying off the policy, it will cover the entire cost. If you have health issues, you may be issued a graded policy which will only cover the amount of money you’ve paid toward the policy. The rest would have to be paid upon the death of the insured.

However, financing charges over time will add to the total cost of the funeral arrangements, negating your preplanning cost-saving efforts. Payments of a few hundred dollars a month can add thousands to the overall cost. We were offered the option to pay the balance in 90 days, same as cash.

Should you move to another market, your insurance policy is portable. The money can be used to pay another funeral home, although you lose the benefit of “locking in” today’s prices with the original funeral home. If your money is held in a state’s funeral trust fund, you should be able to get your money back with interest.

In Conclusion:

While I have advocated preplanning your funeral for years, I finally took my own advice and committed funding for myself. If I can do this and live to talk about it, you can too.

The moral here is that you can be prepared for your own funeral without having to spend your children’s inheritance. You can reduce stress and conflict, save money, and help your loved ones hold a “good goodbye.”

If you’re serious about taking care of business (like Elvis), visit several funeral homes and shop BEFORE you drop.

According to Internal Revenue Code (“Code”) Section 6018, if the gross estate of an individual exceeds the basic exclusion amount in effect under Code Section 2010(c), then the executor shall file the Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return (“Form 706”). In 2022, the Code set the basic exclusion amount at $12.06 million. Although a gross estate may not exceed the applicable exclusion amount, the executor may want to file Form 706 for another reason. If the decedent was married at death, then their executor may want to file Form 706 to take advantage of portability.

In 2010, President Barack Obama signed the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act (“TRUIRJCA”) into law introducing the concept of portability, among other things. Portability allows the surviving spouse to take into account the decedent spouse’s Deceased Spousal Unused Exclusion (“DSUE”) amount in addition to their own applicable exclusion either during their lifetime or upon death. The Form 706 TRUIRJCA contained a sunset provision that would have terminated portability at the end of 2012. President Obama changed that and made portability permanent when he signed the American Taxpayer Relief Act into law in early 2013. An executor elected portability by filing a Form 706. An executor has nine months from the date of death with an automatic six-month extension to file the Form 706. If an estate was not required to file Form 706, then the Internal Revenue Service (“IRS”) had the discretion to extend the time for filing Form 706. Executors wishing to ask the IRS to exercise its discretion did so by obtaining a Private Letter Ruling (“PLR”). In part because of the significant amount of PLRs requested in this area, the IRS issued Revenue Procedure 2017-34.

In Revenue Procedure 2017-34, the IRS granted a blanket two-year extension to elect portability to any estate not otherwise required to file a Form 706. Thus, an executor had additional time to file Form 706 for the sole purpose of electing portability. If the executor missed that date, then the executed needed to obtain a PLR to seek portability. Once again, due to the numerous PLR requests for this relief, the IRS issued Revenue Procedure 2022-32 on July 8, 2022. In Revenue Procedure 2022-32 the IRS extended the time during which an executor may file a Form 706 to elect portability from two years to five years without obtaining a PLR. Of note, the executor needs to ensure that Form 706 has the following language at the top of page 1 “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” This extended time will serve executors well and provides additional time to consider whether it makes sense for a particular estate to file Form 706 for portability. This will become increasingly important for executors of estates with decedents dying before January 1, 2026, at which time the provisions of the Tax Cuts and Jobs Act of 2017 which temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation, is set to sunset.

Let’s review an example to see how portability works in practice. Assume that Bert and Ernie are married, have a net worth of $30 million, and hold all their assets as tenants by the entirety. If Bert dies leaving his entire applicable exclusion amount of $12 million (note that we assume the 2022 applicable exclusion amount of $12.06 million but rounded down for purposes of this example) unused and his executor fails to take advantage of portability, then his estate will avail itself of the unlimited estate tax marital deduction and have no federal estate tax liability. Clearly, Bert’s estate has suffered no economic loss. Of course, upon Ernie’s death a few years later when the applicable exclusion amount has risen to $13 million, Ernie’s estate will have an estate tax liability of $6.8 million ($30 million taxable estate – $13 million applicable exclusion * .40 tax rate). If, instead, Bert’s executor had elected portability, then Bert’s executor would have filed Form 706 to port Bert’s unused applicable exclusion amount of $12 million. Upon Ernie’s later death, Ernie’s estate would have had an estate tax liability of $2 million ($30 million taxable estate – $12 million DSUE – $13 million applicable exclusion * .40 tax rate). Obviously, portability produced much lower tax liability for Ernie’s estate.

Although portability has many benefits as demonstrated in the example above, it has some pitfalls. First, portability does not apply to the Generation-Skipping Transfer Tax Exemption which allows the transferor to avoid taxation on distributions to the next generation. Second, portability carries over only the applicable exclusion of the decedent upon death and does not account for any appreciation of the assets in the surviving spouse’s estate. Third, most states that impose a state estate tax do not have statutes that allow for the portability of the state estate tax exclusion amount. Finally, planning to use portability generally means that the surviving spouse receives the assets outright, which gives the surviving spouse the opportunity to distribute assets in a way not contemplated by the decedent spouse when the decedent spouse created the plan.

As this article demonstrates, extending the time during which an executor may elect portability gives the executor wide latitude to consider whether portability works best for the estate. The passage of Revenue Procedure 2022-32 provides extra time for me to help clients who had no obligation to file Form 706, but who may have missed the original two-year deadline for electing portability.

Most individuals understand the need to dispose of their tangible and intangible assets upon their death and use either a Will or Trust to accomplish that. Although it’s clear that these documents govern the disposition of tangible and intangible assets, it’s not as clear that a personal representative or trustee can use the provisions of these documents to obtain access to digital assets. Thankfully, companies that host digital platforms have begun to address this issue. In mid-December, Apple released iOS 15.2 introducing the concept of the “Legacy Contact” setting. While this release may have flown under the radar for some, it certainly garnered attention in the Estate Planning world. The technology giant finally joined Google and Meta (formerly known as Facebook) in providing a way for designated parties to access the digital content of an account holder after death.

For those who are unfamiliar with the concept of a Legacy Contact, anyone who uses the Meta Platform (which includes Facebook and Instagram), a Google account, or an iPhone can select one or more individuals (Apple allows up to five and Google allows up to ten) to access those accounts and the digital content therein after death. Each organization has enacted different protocols regarding how much control the owner has over who can download their data or access the profile after death. For example, Apple takes an “all or nothing approach” essentially allowing the Legacy Contact to access everything including messages, files, and photographs if they have the access key. Google, however, employs a more selective approach and provides the account holder with options to tailor what gets shared after a period of inactivity, even going so far as to authorize a complete wipe of the account after a certain amount of time. Facebook grants the Legacy Contact permission to memorialize the account or delete it entirely after the user’s death. Generally, the Legacy Contact tools do not require the owner to share account credentials or passwords with the Legacy Contacts during life, nonetheless, the owner should exercise caution when choosing designees.

Most digital accounts contain the Legacy Contact set-up under “Account Information,” “Settings,” or “Inactive Account.” As with the individuals named in your Estate Planning documents, each user of such accounts needs to consider who should be named, in what capacity, and how much access you want to give that person if you have the option to limit access. Remember that not every digital platform empowers a user to choose what information gets shared so it’s important to review the policies and procedures for all of your digital platforms and remember that the individual selected may still need to provide requested documentation or proof of their identity. Of course, you can always provide access during life, but that creates a different issue of shared access while you are alive and actively using the account.

In addition to setting up Legacy Contacts, account owners have the option to store their login information in password manager applications. These applications such as LastPass and 1Password store current login information, generate unique passwords for all accounts linked to the service and grant the account owner the power to designate individuals who should have access after death. Of course, this requires advance action prior to death. 1Password has shared “vaults” that permit the designated individual to have access to the shared folder. In addition, users may print an “emergency kit” that includes log-in information and a QR code. The chosen individuals use the QR code to access 1Password’s website where they can log in to your account using the information provided in the kit. This gives the selected individuals access to any account stored in 1Password. Much like Apple, Google, and Facebook, LastPass allows the account owner to designate a list of trusted individuals and set a wait time. Once the owner designates the trusted individuals, LastPass invites each to create their own account. The trusted individuals may request emergency access to the owner’s account. If alive, the owner has the set wait time to approve or deny access. This method requires no death certificate or proof of death for access and accordingly is useful at death and during incapacity.

As companies continue to evolve and replace passwords with fingerprints, face scans, and device passcodes, they will need to develop and implement new back-end identity and authentication policies. You can set up access in your apps and device settings. It’s also important to share your phone passcode because many accounts require two-factor authentication, which requires the input of a code generated in apps or sent via text message. Even with the progress in technology, it’s still possible to use the old-fashioned approach of jotting down a list of accounts and passwords on paper and storing the list in a safe place with your other important documents. Whatever method you use, it’s vital to undertake the task of enabling the tools while you are alive to save your loved ones’ aggravation after your death. No matter the password-storage method you use, make it easy for your trusted contacts to know what accounts you have and how to log in. Without this access, the loved ones left behind would lose the information, photos, and other priceless keepsakes contained in these accounts.

Some clients worry that certain beneficiaries will challenge their Estate Plan after death. Sometimes it’s because they have structured their plan to favor one beneficiary over another. Other times, it’s because they have left assets in a trust and named an individual other than the beneficiary of the trust to serve as Trustee of the trust. Occasionally, it’s because they have disinherited their family members in favor of a charity or individuals to whom they are unrelated. No matter the reason, clients have options to protect their carefully constructed Estate Plans. Qualified Estate Planning practitioners often recommend inserting provisions designed to lower the chance of a post-death challenge by a disgruntled beneficiary. The first part in this two-part series, Part I explored undue influence, the most common challenge to an Estate Plan, along with many of the typical scenarios in which beneficiaries raise the issue. This second part will provide practical advice for preventing challenges to an Estate Plan.

Including a “no-contest” clause as part of your Estate Plan represents one of the easiest ways to prevent an attack against the plan. In basic terms, a no-contest clause, sometimes also referred to as an “in terrorem” clause, provides that if a beneficiary challenges the plan unsuccessfully, that beneficiary forfeits any gift to which they would have otherwise been entitled under the plan. This means that for the no-contest clause to have the desired effect of chilling litigation and potential challenges, the testator needs to spend time considering how much to leave the beneficiary they expect to challenge the Estate Plan. There’s no deterrent for someone who has nothing to lose.

Let’s review an example to illustrate this principle. Assume that Betty has $6 million and three children, Blanche, Dorothy, and Sophia. Sophia stopped talking to Betty several years ago and for that reason, Betty has decided to leave her estate to Blanche and Dorothy. If Betty leaves nothing to Sophia, Sophia could challenge the plan, even if Betty’s plan included language that specifically disinherited Sophia. While Sophia may lose the challenge, the stress and turmoil could fracture her relationship with her sisters and delay the distribution of Betty’s estate. If Betty decided to leave $100,000 to Sophia, perhaps that amount along with the inclusion of a no-contest clause in her plan would deter Sophia from initiating litigation. If she decided against challenging the plan, Sophia would receive her $100,000 and each of Blanche and Dorothy would take $2,950,000. This would also preserve family harmony and prevent the financial and emotional drain of a protracted dispute. If instead, Sophia decided to challenge the Estate Plan and lost, then she would lose the $100,000 altogether and risk irrevocable damage to her relationship with her sisters.

As the above example demonstrates, the use of an in terrorem clause in a Will or Trust protects the intentions of the testator or grantor from attack by the disgruntled beneficiary by completely disinheriting the beneficiary who challenges the terms of a Will or Trust. These clauses do not work the same in every state and some states impose additional requirements before disinheriting the beneficiary. It’s important to understand the enforceability of these clauses in the various states. For example, neither Florida nor Indiana recognizes in terrorem clauses, but all other states acknowledge the use of the no-contest clause in varying degrees. About half of the states that enforce the no-contest clause require probable cause on the part of the beneficiary to initiate the lawsuit which adds another layer of protection for the plan. Most states construe a no-contest clause strictly and narrowly and will enforce a no-contest clause only when the beneficiary’s conduct falls into a category prohibited by the no-contest clause.

Even in those states that recognize an in terrorem clause, if your Estate Plan deviates from equal treatment of all beneficiaries of the same relation to you, then it’s best to let your family and loved ones know of your plans and the underlying reasoning for its structure. While they may not agree with your decision, advance knowledge of the plan and time to digest the consequences of that plan while you are alive may prevent litigation after your death. Couple this with inclusion of an in terrorem clause and you may have significantly decreased the chance of future challenges. Remember that leaving a token amount to a beneficiary may not be enough to deter a beneficiary determined to overturn your plan. Instead, you should ensure that the in terrorem clause has teeth by including a modest gift to ensure that forfeiture of that amount would disappoint the beneficiary should they choose to challenge the plan. The harsh result of forfeiture of the gift or bequest under a Will or Trust helps to protect the plan. Even in states like Florida and Indiana that do not recognize the validity of no contest clauses, inclusion of the clause in an Estate Plan may chill litigation and ensure that the testator or grantor’s intended plan of distribution stands. No matter your jurisdiction, it’s vital to understand these complex and evolving rules and I will help you understand how inclusion of this clause along with other provisions safeguards your plan.

The time immediately after the death of a loved one can be stressful and overwhelming. Family members are grieving, and on top of this, they must handle a variety of organizational and legal tasks. In many cases, there can also be disputes concerning who gets certain possessions, which can make the whole situation even messier and create some ugly conflicts. Fortunately, you can minimize many of these complications by addressing these matters ahead of time and creating a letter of instruction, which is generally broken down into three parts.

1) Funeral Arrangements
This typically begins with making a list of all the people, organizations, agencies, and professionals who should be notified upon your death. You should include contact information like phone numbers, email, and mailing addresses, along with any other pertinent details. If you are an organ or tissue donor, you will want to also include relevant information.
You will need to leave everything your loved ones should know about your burial method, including whether you will be buried in a plot or cremated. In the event that you have paid for funeral arrangements in advance, you should include this information as well.

2) Financial and Personal Affairs
When it comes to finances, you can start by listing contact information for your attorney, stockbroker, employer, insurance agent, financial planner, etc. You should make it as easy as possible to reach anyone involved with your financial matters. It’s also important to make note of all your financial accounts such as checking, savings, retirement funds, and credit cards. If you want to contribute to any charitable organizations, you will also need to include their contact details.

For personal affairs, you should state the location of documents like your birth certificate, marriage certificate, divorce papers, diplomas, etc. This should streamline things and make it much easier for your loved ones to get your documents organized.

Since there is a lot of sensitive information concerning financial and personal affairs, you need to ensure that all records are kept in a safe place like a fireproof lock box in your home. The only people who should have access to the lockbox are you and your executor.

3) Distribution of Personal Effects
Finally, it’s smart to go in-depth about how your personal possessions should be distributed among family and friends. Basically, this will elaborate upon your will and take it one step further so there is no confusion or disputes. This is where you state who gets smaller items like your electronics, books, dishes, and so on.

While there is some debate as to whether you should discuss whom you plan to give what ahead of time, it’s usually not a bad idea to sit down and go over things while you can still get everyone’s input. If a certain family member has no interest in a particular item, then you could give it to a different family member who could make better use of it. Also, don’t forget to make arrangements for who will care for your pets.

Sometimes clients have concerns about whether their Estate Plan could withstand a challenge after their death. If the plan deviates from the equal treatment of all beneficiaries in the same class, then that may cause a client to worry about how best to protect the plan. Often the unequal treatment results because one beneficiary took on a caregiver role as the testator aged. Perhaps a niece or nephew stepped in when the client’s children were out of state. Regardless of the reason, many a beneficiary who has not received what they considered their “fair share” of an estate has challenged an Estate Plan based upon undue influence. This first part of a two-part series explores the concept of undue influence and the second part will provide practical advice for preventing an undue influence challenge in an Estate Plan. 

Undue influence occurs when someone takes unfair advantage of another individual, usually elderly, especially when the first individual holds real or apparent authority over the elderly person. Simple enough to explain but harder to understand. To gain an understanding of what constitutes undue influence requires an examination of the underlying behavior. The American Bar Association indicates that undue influence occurs when an individual in a fiduciary capacity or other confidential relationship substitutes their own desires for that of the influenced person’s desires. Put another way, a person influenced the testator in such a way that convinced the testator to alter his or her Estate Plan, usually in favor of the individual exerting the undue influence and to the detriment of the testator’s other beneficiaries. 

The states vary widely in their definition of undue influence. Some states, like Florida, Georgia, Louisiana, Nevada, North Dakota, South Dakota, and Ohio, have partial definitions in their statutes which broadly define undue influence as something that occurs when a fiduciary or confidential relationship exists and one person substitutes his own will for that of the donor’s will. Other states have definitions of undue influence in their civil code or penal code, rather than their probate code. In addition, most states, like California, have case law that sets out defining aspects of undue influence. It appears that most states rely upon case law to determine what constitutes undue influence and most of the time it occurs in the probate context. Each state lists certain factors that indicate the presence of undue influence, such as intimidation, physical threat, or coercion. Perpetrators of undue influence use subtle tactics and usually enjoy a close relationship with the testator. 

In any undue influence case, it’s vital to understand which party has the burden of proof. While you may assume that all states impose that burden upon the plaintiff, that’s an oversimplification of the matter. Some states, like Florida, allow the plaintiff to demonstrate a few threshold facts that will raise the presumption of undue influence. Accordingly, when the presumption of undue influence arises, the alleged wrongdoer bears the burden of proving there was no undue influence. Usually, the defendant can easily overcome the presumption and the testator’s Estate Plan will stand. 

Interestingly, Virginia recently enacted a statute effective July 1, 2022, essentially creating a presumption that undue influence occurred when alleged. While it’s unclear what facts the plaintiff will need to show to raise the presumption, this represents a departure from prior law which created a temporary presumption that defendants could easily overcome. The new law alters the burden of persuasion in most circumstances. Under the new statute, the plaintiff receives the benefit of a “presumption” that undue influence was exerted over the decedent, and the burden now shifts to the defendant to rebut that presumption. In other words, the defendant now has the job of convincing the jury or judge that undue influence did not occur, and if the defendant does not meet that burden of persuasion, the defendant will lose. 

As this article demonstrates, undue influence is a grey area of the law. Certain facts provide clues that undue influence may have occurred. As noted above, if the person leaves their assets in a way that departs from the norm or favors one child to the exclusion of all others, that might be a sign of undue influence. If an elderly person disinherits their children or grandchildren in favor of their caregiver, that might also signal undue influence. Of course, that doesn’t mean that you cannot leave your assets in a usual manner. It simply means that if you choose a unique disposition for your assets you need to take additional precautions in creating your plan. Keep the possibility of an undue influence claim in mind.

There are many factors to consider when creating your Estate Plan and potential challenges to it. It’s important to evaluate your beneficiaries and understand whether they have expectations regarding an inheritance and how far they might be willing to go if your plan fails to meet those expectations. While many state legislatures are doing more to protect the elderly and their Estate Plans, others seem to be opening the door to increased litigation. By consulting with me, you can minimize the risk of a challenge to your Estate Plan based upon undue influence. 

Many Estate Plans rely upon a revocable trust as one of the foundational documents in the plan to avoid probate. Sometimes, plans include irrevocable trusts to achieve tax-driven results or for other reasons. No matter which kind of trust a client considers, of the many decisions that clients make when creating an Estate Plan, naming a trustee tops the list in importance. Some clients prefer to name an institution or entity to serve as trustee.

Entities serving as trustees provide numerous benefits. For example, a client naming a corporate trustee generally has less concern regarding the judgment, experience, impartiality, investment sophistication, accounting, record-keeping, or potential conflicts of interest of the entity. Most institutional fiduciaries bring substantial business skills to the office of trustee. The individuals working for the entity and monitoring and administering the trust account usually report to a board, committee, superiors, or a combination of all three to confirm proper investment, administration, and distribution of trust assets. Corporate trustees understand the market and have experts to guide investment choices. Clients benefit from this knowledge. In addition, most corporate trustees have a plethora of attorneys, accountants, and other professionals to whom they can refer a beneficiary, even on an unrelated matter. The grantor and beneficiary benefit from both the internal and external relationships of the institutional trustee.

As noted above, a corporate trustee brings experience, objectivity, and professional resources to the office of trustee. For this reason, corporate trustees tend to dampen family squabbles that might otherwise result from naming an individual to serve as trustee. Consider the resentment that could occur from naming one family member as trustee of the trust created for the benefit of another. Further, with an individual trustee, beneficiaries may wonder whether another beneficiary has influenced the trustee because anytime the trustee says yes to one beneficiary, that almost universally means saying no to another. Corporate trustees operate without bias and comply with both federal and state regulations. Thus, what the trust and beneficiaries lose in personalization, they gain in oversight.

Corporate trustees bring continuity to the office of trustee. Entities have perpetual life absent catastrophic circumstances, whereas, all individuals die, sometimes unexpectedly. Naming a corporate trustee removes the burden of naming a successor trustee and guarantees that the same trustee continues to serve for the duration of the trust unless removed. A corporate trustee possesses the potential ability to manage the trust in perpetuity from record-keeping to asset management which, given the increasing length of most trusts, adds another benefit to the beneficiaries.

Finally, corporate trustees should understand the complex tax implications for a trust. For example, they understand and can explain the impact that allocation of gains and losses will have on the income of the trust and its beneficiaries. Naming a corporate trustee may also provide gift and estate tax benefits as well because provisions of the Internal Revenue Code qualify an entity as an independent trustee which could carry significant tax benefits for the grantor and beneficiary by preventing inclusion of the assets in the estate of either. This also allows the grantor to include broad discretionary distribution powers in the trust.

All these benefits come at a cost. Institutional trustees tend to charge higher fees than individuals and some beneficiaries miss the personal touch that comes along with the use of an individual trustee. Many of us have heard stories about an unresponsive corporate fiduciary. Typically, only specified financial institutions, such as banks and trust companies may serve as trustees. In some states, a charity may serve as trustee of a trust benefitting that charity, or another one. Some states require the institutional trustee to have a substantial presence in the state in which administration of the trust occurs. Other states have reciprocity rules and permit a corporate fiduciary from another state to serve if the other state recognizes corporate fiduciaries from the first state. Even if the foreign entity otherwise meets the requirements to serve in another state, the entity needs to file all necessary documents to qualify to do business in the new state. This often requires designation of a resident agent along with other information.

Although many clients may fear the perceived loss of control that comes with a corporate trustee, as this article demonstrates, naming such a trustee provides many benefits. The size and complexity of the trust plays a role in determining whether an individual or corporate trustee should serve. The individuals administering the trust for a corporate fiduciary interact with other highly qualified individuals to provide the best result for a beneficiary. Corporate trustees can ignore family tension and have well-defined policies regarding distributions. The grantor may include broad discretionary distribution powers without worrying about the potential income tax implications for the corporate trustee. Corporate trustees combined with broad discretionary distribution power may provide significant creditor protection. Finally, clients may leave a level of control with the family by allowing the beneficiaries to remove and replace a corporate trustee. The grantor of a trust has competing interests to consider in naming a trustee. With my assistance, a client can determine whether a corporate trustee or an individual trustee will serve the family’s needs better.

Many Estate Plans rely upon a revocable trust as one of the foundational documents in the plan to avoid probate. Sometimes, plans include irrevocable trusts to achieve tax-driven results or for other reasons. No matter which kind of trust a client considers, of the many decisions that clients make when creating an Estate Plan, naming a trustee tops the list in importance.

After clients create the basic documents in their Estate Plan, they begin to consider more advanced techniques, usually involving the use of irrevocable trusts. Many clients use irrevocable trusts to lower their potential estate tax liability. These same clients may want to ensure that the beneficiaries cannot retrieve the funds before their death or to prevent a beneficiary’s creditors from acquiring trust assets. Some even want assurances that they could access the funds, if necessary. In most circumstances, retaining too much power causes the gift to fail, resulting in estate tax inclusion thereby thwarting the original goal.

If a client creates an irrevocable trust to remove rapidly appreciating assets from his or her taxable estate, then any appreciation on those assets will escape taxation upon the client’s later death if structure correctly. If the trust gives the trustee the sole, unlimited, or absolute discretion to make distributions of income or principal to the beneficiaries, then the Internal Revenue Service (“IRS”) considers that an incomplete gift for gift tax purposes, and Internal Revenue Code (“Code”) Sections 2036(a)(2) and 2038 would pull those assets into the trustor’s estate if the trustor is the trustee. If, however, the trust includes the ascertainable standard of health, education, maintenance, or support (“HEMS”), then the IRS considers the gift complete and the assets outside of the grantor’s estate. If the trustor insists upon serving as trustee, any power to make distributions not limited by the HEMS standard needs to be exercisable by a trustee other than the trustor. As explained in more detail below, other trust powers could cause inclusion in the trustor’s estate if the trustor serves as trustee. For that reason, if the trustor desires to avoid estate tax inclusion above all else, then the trustor should name another individual to serve as trustee.

Related to Code Section 2036(a)(2), Code Section 2036(a)(1) includes assets in the trustor’s estate if the trustor makes a gift but retains the possession or enjoyment of, or the right to income from, the property. If the trust named the trustor as a permissible beneficiary of the trust and an independent trustee had the sole, unlimited, and absolute discretion to make distributions from the trust, then it seems that the trustor Ha avoided this Code Section. However, that’s not always the case. In many states, even if the trustor has named an independent trustee, acting in their sole, unlimited, and absolute discretion to make distributions to the trustor, that causes the inclusion of the trust assets in the grantor’s estate. Although a handful of states including Alaska, Colorado, Delaware, Missouri, Nevada, Rhode Island, and Utah have passed statutes that permit the grantor to be a discretionary beneficiary of a trust without causing estate tax inclusion, if there is an understanding regarding distributions to the trustor, then that could lead to estate tax inclusion. Even in these states and even absent an implied understanding regarding distributions to the trustor, the planner needs to follow the statutory requirements carefully, otherwise, the trust may not achieve the desired result.

By serving as trustee of an improperly drafted trust, the trustor could defeat that plan. This is the case even if the trustor is a co-trustee rather than the sole trustee, or if the trustor retains the power to veto power of distributions. Thus, it’s usually best for the trustor to refrain from serving as trustee unless there is an explanation of the permissible exercise of power, includes the appropriate distribution standard, and sanitizes the trust of any power that could cause inclusion. However, most I recommend that the Trustor name another individual to serve as Trustee to avoid any possibility of inclusion. Thankfully, the trustor need not ignore the office of trustee entirely. The trustor may retain the power to appoint a co-trustee or successor trustee without causing inclusion of the trust assets in the trustor’s estate upon death. In fact, according to Revenue Ruling 95-58, the trustor may even retain the right to remove a trustee and appoint a successor trustee not related or subordinate to the trustor within the meaning of Code Section 672(c).

Finally, if the trustor is not serving as trustee, the trustor needs to understand whether the trust contains powers to make it a grantor trust. If the trust contains certain powers that make it a grantor trust, then the grantor will be treated as the owner of the trust for income tax purposes and will need to include any trust income on their Form 1040. Certain powers, for example, the power to pay life insurance premiums, the power to add beneficiaries, or a charity, to the trust, and the power to substitute assets in a non-fiduciary capacity all-cause grantor trust status. Well-drafted trusts cause grantor trust status for income tax purposes but avoid estate tax inclusion for the trustor upon the trustor’s death and often serve as the base for advanced estate planning techniques.

Most people understand the need for foundational documents and have less trouble deciding who should serve as trustee because that trustee will not serve as trustee until after the trustor’s death. Those clients who want to take advantage of tax planning and create irrevocable trusts during life inevitably want to name themselves as trustee. As is demonstrated herein, a trustor needs to consider the purpose and the provisions of the trust to comprehend the potential income, gift, and estate tax consequences that could result from serving as trustee.

A revocable trust is often the foundational document in the plan to avoid probate. Probate can be an expensive, time-consuming, and public process. Some plans include irrevocable trusts to achieve tax-driven results or for other reasons. No matter which kind of trust we consider, of the many decisions that clients make when creating an Estate Plan, naming a trustee tops the list in importance. While any competent adult may serve as trustee, many states place restrictions on which entities may serve as trustee.

Let’s start with location, which should be one of the more obvious considerations for a trustee. A trustee should be a United States (U.S.) person for tax purposes. If any of the following are true: a non-U.S. person serves as sole trustee, non-U.S. persons constitute at least half of the trustees, or if a non-U.S. person may make any “substantial decisions,” then according to Treas. Reg. 301.7701-7(d)(1)(ii), the trust will be considered a foreign trust for income tax purposes. Generally, foreign trusts have increased reporting requirements for contributions to or distributions from the trust. The U.S. grantor of the trust needs to file the Form 3520, Annual Return to Report Transactions with Foreign Trusts, and the Trustee needs to file the Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner. If the Trustee fails to file that form, then the U.S. grantor may face penalties. In addition, Internal Revenue Code (“IRC”) Section 684 triggers gain recognition when no U.S. beneficiaries exist or when the trustor dies. Thus, if possible, name a U.S. person as trustee or find a suitable entity to serve. Note that under some circumstances, naming a trustee who lives in another state may subject the trust to state income tax if the trustee resides in a state that determines the domicile of the trust-based upon the residence of the trustee. Clearly, a Grantor(s) needs to analyze location when determining who to name as trustee.

Aside from selecting a U.S. person to serve as trustee, let’s examine some of the important characteristics that a trustee should possess. The word “trustee” contains the word “trust” which provides the first clue about who will make a good trustee: someone the Grantor(s) trusts. An individual serving as trustee will have to make numerous decisions throughout the administration of the trust and these decisions require a certain degree of judgment, experience, impartiality, investment sophistication, record-keeping ability, and the ability to avoid conflicts of interest. The trustee will need to follow the letter and spirit of both the trust agreement and the governing state statutes. These decisions become more complex when tension exists between the beneficiaries. Many clients believe that naming siblings as co-trustees will force the siblings to work together. Often, it has the opposite effect and causes resentment and a situation in which quid pro quos are the norm. Another common situation involves a trust created for the benefit of a spouse during their life with the remainder to children who are not the biological children of the surviving spouse. Giving the trustee power to make distributions of principal for the surviving spouse would reduce the amount passed to the children upon the death of the surviving spouse. The individual serving as trustee needs to understand these family dynamics and the potential for rifts to occur. Clients often believe their family to be immune to these behaviors, but a well-counseled and wise client understands that these problems occur frequently and plans for them.

Once the Grantor(s) has confidence that the proposed individual trustee possesses the power to navigate a messy situation involving beneficiaries, the Grantor then needs to understand the powers that the trust agreement gives to the trustee and the impact of those powers. This begins with deciding what distribution standard will guide the Trustee. Giving a trustee absolute, unlimited, or sole discretion puts the trustee in complete control of distributions and makes it harder for a beneficiary to compel distributions if the trustee isn’t making them. While this standard provides the highest level of asset protection, it comes at a price. One option would be instead to insert a power to distribute for health, education, maintenance and support, also knowns as the “HEMS” standard. The HEMS standard provides less asset protection because if a potential creditor falls into any of those categories, that creditor may be able to defeat the asset protection component of the trust.

The HEMS standard plays an important role in trust distributions for other reasons as well. If a beneficiary serves as trustee of their own trust, but can make distributions in their absolute, unlimited, or sole discretion, then that beneficiary has a general power of appointment over the assets in that trust. IRC Section 2041 will include assets over which a beneficiary has a general power of appointment in the estate of that beneficiary upon the death of said beneficiary. If the beneficiary does not have a taxable estate, then estate tax inclusion may not matter. Further, if a beneficiary trustee may make distributions to another beneficiary under the absolute, unlimited, or sole discretion standard, then that beneficiary-trustee may have made a gift to the other beneficiary. Clearly, using the HEMS standard for distributions provides safeguards, especially when a beneficiary serves as trustee.

Finally, the Grantor(s) needs to consider who will serve should the original choice be unable or unwilling to serve. The same considerations discussed above should guide the Grantor(s) in selecting a successor trustee. Clearly, competing interests color the appointment of an individual trustee. An individual with the right temperament may reside in an undesirable location. The Grantor(s) may lack individuals with the right temperament. Finally, even if the trustee resides in the U.S. and has the other necessary skills, the Grantor(s) needs to review and understand the distribution standards in the trust to avoid undesirable consequences.