Author Archives: Robert Mondo

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.

Revocable Trusts lay the foundation for many an Estate Plan. They serve various functions, like avoiding probate, planning for incapacity, protecting beneficiaries, and providing continuity after death. Revocable Trusts provide the grantor with flexibility by giving the grantor the right to change the trust during their lifetime. Well-written trusts contain explicit instructions regarding the steps that the grantor needs to follow to amend, revoke, or change the trust. If a Revocable Trust lacks those specific instructions that can lead to questions regarding the grantor’s intent and ultimately, litigation, which benefits no one. Let’s look at a recent Michigan case, In re Gregory Hall Trust, No. 361528 (Mich. Ct. App. Mar. 16, 2023), that underscores the importance of clear instructions in the trust agreement.

Gregory Hall created a Revocable Trust that he subsequently amended and restated. The amendment and restatement indicated that his three children, Kenneth, Cheryl, and Michael, would split the residue of the trust after Gregory’s death. The amendment and restatement indicated that Gregory could amend the trust “by an instrument in writing delivered to the Trustee.” The trust provided no instruction regarding whether Gregory needed to sign the instrument or whether any other formalities typically required for trust amendment were necessary. A few years later, Gregory prepared a spreadsheet, the contents of which remain unknown. Several years after the amendment and restatement, but just weeks after preparing the spreadsheet, Gregory conveyed his home worth $500,000 to Kenneth. A few years later, Gregory created another spreadsheet reflecting the value of his overall estate, approximately $6 million, and reflecting conveyance of the home to Kenneth. After Gregory died, Kenneth argued that the house was a gift to him and that entitled him to 1/3 of the residue of the trust. Kenneth’s siblings indicated that the home was an advancement and argued for reduction of Kenneth’s 1/3 share of the residue by the value of the home.

After Gregory’s death, all three children became co-Trustees of the Trust. Cheryl and Michael petitioned the court for limited supervision of the Trust to resolve the advancement issue. Kenneth failed to cooperate during discovery and violated several of the court’s orders relating to discovery during the proceeding. Ultimately, the lower court found in favor of Cheryl and Michael and entered a default judgment against Kenneth as a discovery sanction. Kenneth appealed and the higher court affirmed the lower court’s decision. Kenneth’s egregious behavior concerning the documents and related electronically-stored information requested during discovery despite numerous reprimands from the lower court convinced the higher court of the correctness of the lower court’s decision. For those interested, here’s a link to the case detailing Kenneth’s bad acts: In re Gregory Hall Trust.

For purposes of this article, though, the discovery issue isn’t the most compelling part of this case. It’s that the lower court found that the second spreadsheet created by Gregory met the statutory definition of a contemporaneous writing as applied to trusts. The statute provides that an advancement includes property given by the testator during life if “the testator declared in a contemporaneous writing that the gift is in satisfaction of the devise or that its value is to be deducted from the value of the devise.” Based upon this statute, the court considered the transfer of the home an advancement rather than an intervivos gift. While the court never made an express finding that the spreadsheet was a declaration, their decision permits us to infer that the spreadsheet was a declaration for purposes of application of the statute. The court remained silent regarding the length of time between the amendment and restatement and creation of the second spreadsheet, but perhaps the first spreadsheet prepared just weeks before the transfer convinced the court that the second spreadsheet merely confirmed the contents of the first.

The court never disclosed whether Gregory’s Will or Revocable Trust contained language regarding an advancement but maybe it didn’t matter. Perhaps this case demonstrates the willingness of a court to apply statutes broadly to achieve the desired result in a matter. If nothing else, In re Gregory Hall Trust provides valuable lessons on the importance of clear instructions in the trust agreement regarding what constitutes an amendment, as well as how to effectuate such an amendment. Further, the trust agreement should have clear instructions regarding what constitutes an advancement. As In re Gregory Hall Trust demonstrates, these things are too important to leave to chance.

Organ donation saves lives, even as the donor loses theirs. April is National Donate Life Month. It’s designed to encourage people to register to be organ donors and to talk to their families about it. But few people outside of hospital staff see the process in action.

I’ve recently been spending a lot of time in the Cardiac Intensive Care Unit of a local hospital. A friend had a heart attack, coded and was revived. This is heavy stuff, experiencing a life and death situation. Luckily my friend had done advance medical directives, estate planning and funeral planning. You definitely want to have all of those things in place when a medical crisis hits.

The Walk of Honor

While keeping vigil at the hospital, I noticed a crowd of nurses and other staffers lined up along the corridor in the ICU. What was going on?

One of the ICU patients who was not going to survive was about to be taken to have their organs harvested. The hospital personnel had gathered for a Walk of Honor. They were there to salute this person’s gift of life. I joined the silent crowd.

A team of what seemed like a dozen medical personnel wheeled the patient through the unit. The person’s ebbing life was still supported with multiple IV drips and a portable vital signs monitor. All eyes focused on the crowd moving this person to organ harvesting surgery. Silent tears welled in the eyes of many. I put my hand over my heart.

This hospital’s staff does this Walk of Honor salute with every patient who opts to donate their organs.

One Organ Donation Story

Connie Diamond received a life-saving liver transplant. During National Donate Life Month, she wanted to share her story through this letter she wrote to the family of the donor.

Dear Donor Family,

When I awoke in the intensive care unit after the transplant surgery, I remember the nurse asked me, “How do you feel?” I said, “I feel grateful,” and I cried tears of joy.

After numerous diagnostic tests, a team of transplant specialists placed me on the transplant list over a year ago. My liver deteriorated to end stage liver failure due to a non-alcoholic auto immune disease called Primary Biliary Cirrhosis. I had complications which resulted in several hospitalizations. Transplant was my only viable treatment, my only hope.

In May, I was given the green light by the transplant team to relocate to Arizona for several months to be readily available for an organ donor match. I flew out to Arizona immediately, by myself, packing a bag big enough to fill with hope, optimism, positivity, and determination. I lit prayer candles. I opened the window coverings so I could see the sunrise on a new day of hope for a donor liver. I kept my cellphone fully charged and placed it on my chest as I slept. I met some special people who had transplants and were recovering. They became my angels while I waited for “the call.”

I am a 70-year-old youthful grandma and proud adoptive, single mother of accomplished twin girls, now age 34: Lauren, a registered nurse, and Jennifer, an honor student in Chemical and Biological Engineering. I also have a precious granddaughter, Maggie, 9 years old, my swim buddy and joy of my life!

While I waited for an opportunity for a transplant, I prayed and maintained a positive attitude. I readied myself to be physically and mentally strong. A driving force that kept me holding on was my wish to be able to attend my daughter Lauren’s wedding in California. August 2, “the call” came and I knew the angels were circling. I made a miraculous recovery and was discharged in record time. Less than two weeks later, on September 10th, I walked my daughter down the aisle with her dad.

I count my blessings every day, and every day think of you and your loved one who gave me this gift of life. I once had a vibrant career and I was forced into retirement, but now I feel like I have more to do in this life, a bigger purpose, and I feel compelled to give back.

With every beat of my heart, I live in gratitude for this precious gift of life from a beautiful loving soul and family. May you have solace in knowing that your loved one’s organ saved my life.

Make Your Wishes Known

National Donate Life Month (NDLM) was established by Donate Life America and its partnering organizations in 2003. Observed in April each year, National Donate Life Month helps raise awareness about donation, encourage Americans to register as organ, eye and tissue donors, and to honor those that have saved lives through the gift of donation. 

If you decide to become an organ donor, talk to your loved ones about what it means to you to make this life-giving choice. They are going to be the ones who have the final say once you are terminal.

Married individuals may decide to create a joint trust to address their Estate Planning needs.  Joint trusts make sense in community property states (Illinois is not a community property state) because those states consider assets accumulated during the marriage as community assets and require that both spouses have equal management rights with respect to the community assets.  Joint trusts may provide benefits in separate property states as well by eliminating the need for separate trusts for each spouse.  In a typical joint trust, each spouse decides what will happen with their respective contributive share of trust assets upon their death.  They retain control of the assets during their life, just as they would were their assets in separate trusts.  A joint trust is nothing more than two separate trusts governed by one document instead of two.  Clients often prefer joint trusts because they have familiarity with joint property.  Typically, the trust has three property schedules, one for each grantor and one for their community or joint assets.

Spouses in second marriages find these trusts useful because they allow the survivor to have continuing access to assets or wealth that the couple accumulated together while maintaining some separateness thereby allowing the spouses to split whatever remains at the second death however they like.  Of course, joint trusts for second marriages require careful drafting and consideration.  For example, naming the surviving spouse as sole trustee after the death of the first spouse could cause issues.  If the surviving spouse fails to seek competent counsel upon the death of the first spouse, that only exacerbates the issue.  Unfortunately, sometimes a surviving spouse continues to view and use all the assets of the joint trust as their own because they had unrestricted access to the assets during the life of the now-deceased spouse.  Occasionally, the surviving spouse fails to realize that, as the Trustee, they have fiduciary duties to the remainder beneficiaries and a duty to follow the terms of the trust, even if against their self-interest.

A recent Michigan case, In re James M. Kurtz Protection Trust, Docket No 360605 2003 Westlaw 2618498 (Mich Ct App Mar 23, 2023) (unpublished), highlighted some of the issues that arise in a joint trust situation when the surviving spouse lacks competent counsel or fails to retain counsel altogether.  James and Barbara Kurtz created a joint trust naming their respective children from prior marriages as equal residuary beneficiaries after the death of both of them.  The joint trust contained provisions preventing revocation or amendment by the surviving spouse after the death of the first spouse.  The joint trust also gave the surviving spouse the right to withdraw principal.  After Barbara died, however, James purported to restate the joint trust.  He eliminated the children as beneficiaries and named his newly created “protection trust” as the sole residuary beneficiary.  In his capacity as trustee, James made distributions from the joint trust to himself and then used those assets to fund the protection trust.  James named one of his sons as the sole beneficiary of the protection trust.  James died and Barbara’s children initiated a lawsuit challenging James’ actions, including his restatement of the joint trust, his withdrawals from the joint trust, and the creation of the protection trust.  The lower court invalidated the restatement, the withdrawals, and creation of the protection trust.  James’ son appealed.

The appellate court considered both the provision prohibiting amendment of the joint trust as well as the provision allowing the surviving spouse the right to withdraw principal from the trust.  The court determined that one of the main purposes of the trust was to “ensure the children of one settlor would not be posthumously disinherited following the death of that settlor” which was exactly what James did.  By removing assets from the joint trust and putting them in the protection trust, James effectively disinherited Barbara’s children, which frustrated the goal of the joint trust.  The appeals court found that although James had the right to withdraw assets from the joint trust for his own use and benefit, the withdrawals that he made were not for that purpose.  The court determined that the withdrawals that James made were solely to fund the protection trust which was improper.  The court of appeals affirmed the lower court’s rulings with respect to the restatement of the joint trust and withdrawals therefrom.   The higher court indicated that James had the power to create the protection trust, but the terms of the joint trust prohibited unfettered access to the assets thereby preventing him from using joint trust assets to fund the protection trust.

The James case highlights some of the pitfalls that may trap the unwary practitioner with respect to joint trusts and provides several important lessons.  First, even though all the assets are in the joint trust at the first death, it’s important to retain counsel to review the terms of the trust and help guide the trustee through the administration of the joint trust after the death of the first spouse.  Second, it’s vital to follow the terms of the joint trust precisely in making distributions from the trust.  Third, the joint trust need not be irrevocable upon the first death, although the contributive share attributable to the decedent spouse should be irrevocable if protecting the plan is important.  If you want to discuss whether a joint trust is right for you or want to better understand the terms of your joint trust, reach out to discuss.

Each year the Internal Revenue Service (“IRS”) publishes its “Dirty Dozen” list of the most notorious tax scams from the year. The list alerts taxpayers and professionals alike of the most commonly used tax cons during the last year. The scams run the gamut from promoting taking incorrect credits to produce large refunds to misusing international accounts. Let’s dive in!

Perhaps unsurprisingly, five of the twelve scams making their way onto the Dirty Dozen focus on technology and information grabs. The first comes in the form of fake communications from individuals posing as employees of legitimate tax and financial organizations such as the IRS, state departments of revenue, or other similar organizations. Communications arrive in the form of a text, called “smishing” or an email called “phishing” and ask the taxpayer to provide personal information which allows the scammer to steal the identity of the taxpayer. The IRS always initiates contact through mail, not email or text. Tax professionals need to worry about the second of the Dirty Dozen: “spearphishing” which is a phishing attempt targeted at a specific organization. Tax professionals who have suffered a data breach find themselves at greater risk for spearfishing. A successful spearfishing attempt gives the scammer access to client data allowing the thief to file fraudulent tax returns, among other things.

The third on the list involves scammers who offer their services to create a profile for the taxpayer on IRS.gov and prepare tax returns. The online account gives access to valuable tax information about the taxpayer and requires no assistance for creation. The IRS encourages each individual taxpayer to establish their own account. Anyone with access to the account could misuse the information found in the account. Related to the fake online accounts are fake professional preparers who take the number four spot on the list. While many wonderful preparers exist, watch out for anyone who refuses to sign on the dotted line, who charges a fee based upon the amount of the refund, or who neglects to provide their IRS Preparer Tax Identification Number (“PTIN”). Taxpayers should only sign a completed return and should create an IRS account themselves.

Any list of fraudulent schemes would be incomplete without mentioning social media, which is the fifth and final of the technology-related scams. The IRS notes that social media sites circulate inaccurate and misleading information. Some of it relates to common tax documents like Form W-2, or other forms intended to be used by a small group of individuals. The schemes encourage folks to submit false, inaccurate information to secure a refund. The IRS warns that those things that sound too good to be true generally are.

Two separate tax credits make the Dirty Dozen list. The first or number six on the list relates to the Employee Retention Credit (“ERC”). Those promoting the scam encourage individuals who do not qualify for the credit to file for it anyway. The IRS has discovered radio and internet ads regarding the ERC. First, most people do not qualify for this credit and second, the scam gives ne’er-do-wells an opportunity to collect taxpayer information under the guise of a refund that the scammers know the taxpayers cannot receive. The other tax credit scam giving us number seven on the list relates to the fuel tax credit. Here again, the credit has limited application; however, unscrupulous return preparers and promoters entice taxpayers to claim the credit thereby receiving a larger refund. Unfortunately, the taxpayer doesn’t qualify for the refund and will be subject to interest and penalties once discovered. The IRS has indicated an increase in the promotion of filing for refundable credits.

Fraudulent “Offer in Compromise” (“OIC”) mills sit at number eight on the list. The IRS offers OIC to people unable to pay their tax liabilities as a way to settle their debt. They play an important role in our system and require that the taxpayers desiring to avail themselves of such settlement meet certain qualifications. Mills promoting the OIC mislead taxpayers into thinking that they have a valid OIC with the IRS when they do not which often costs the taxpayers thousands of dollars.

The IRS grouped together three separate schemes all with international implications under the “schemes with international elements” umbrella that resides in spot number nine. Of note, the first scheme under spot nine involves use of offshore accounts and digital assets. United States (U.S.) citizens should avoid placing their assets in other jurisdictions for the sole purpose of preventing the IRS from reaching their assets. The IRS has made identifying these accounts and assets a top priority for several years. The second scheme under spot nine involves U.S. taxpayers contributing to foreign individual retirement accounts to avoid payment of taxes. The taxpayer then improperly claims an exemption from U.S. income tax on gains, earnings, and distributions from the foreign account based on the tax treaty with the host country. Finally, the third scheme under spot nine is some U.S. business owners with foreign business interests claim deductions for amounts allegedly paid as “insurance” even though the arrangement lacks many of the attributes of legitimate insurance. The IRS plans to challenge the purported benefits obtained from these transactions and impose penalties. Rounding out the top ten, the IRS warns taxpayers of bogus tax avoidance strategies such as “micro-captive insurance arrangements” and “syndicated conservation easements.”

Bogus charities pose a tremendous issue, especially when a natural disaster or crisis strikes. Number eleven on the list relates to scammers that set up fake organizations to receive contributions from unsuspecting taxpayers. These scams are particularly egregious in nature because they take advantage of tragedy and people’s generosity. The individuals running the fake charities collect personal information and exploit the taxpayers further. Remember that charitable deductions count only if given to qualified tax-exempt entities recognized by the IRS when accompanied by contemporaneous written acknowledgment.

The last of the Dirty Dozen involves two separate schemes aimed at high-income taxpayers. The first involves the use of a Charitable Remainder Annuity Trust (“CRAT”). A CRAT often involves the transfer of appreciated property to the CRAT. When used incorrectly, taxpayers claim that the transfer to the CRAT provides a step-up in basis as if the property were sold. Promoters and advisors sell taxpayers on this and the subsequent elimination of ordinary income and/or capital gain on the later sale of appreciated property from the CRAT. This misapplies the rules under Internal Revenue Code Sections 72 and 664. In reality, when a CRAT sells appreciated assets, those gains flavor distributions to noncharitable beneficiaries of the CRAT. The second relates to monetized installment sales. With these transactions, scammers find taxpayers seeking to defer gains on the sale of appreciated property. For a fee they facilitate a purported monetized installment sale for the taxpayer. An intermediary purchases appreciated property from a seller in exchange for an installment note. The note typically provides for payments of interest only, with a balloon payment of principal at the end of the term. The seller receives most of the proceeds, but improperly delays the recognition of gain on the appreciated property until the final payment on the installment note, often years later.

The IRS encourages taxpayers to be wary, avoid sharing data, and to report fraudsters who promote these schemes as well as those who prepare improper returns. Taxpayers need to protect their sensitive information and exercise caution and common sense both during tax time and throughout the year. Some of the scams listed in this article have been around for a time while others are new to the list this year. The Dirty Dozen serves as a good reminder to protect confidential information and to stay safe out there.