I want to ensure my plan is protected for and from myself…

I’m concerned that during a time of incapacity or distress that I may not be the best suited to be in control.

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Cognitive Decline and Estate Planning

According to a recent Texas Tech University study, the age for peak financial decision making is age 50. Financial decision making ability begins to decline by age 60 and is significantly impacted by age 80. Even more worrisome is that the same studies indicated that people’s perceptions of their own abilities do not decline.

How should this information affect families when constructing their financial and estate plans? Anecdotally, most of my retiree clients who are into their seventies and eighties have not shared, nor intend to share, their financial and estate information with their adult children. They may fail to do so because they fear sharing may result in unreasonable expectations of gifts or inheritance, or simply because that generation generally considers discussion of money and assets a taboo subject.

When retirees aren’t willing to share personal information with those who are closest to them, who’s there to guard against scams? A 2015 New Jersey case is enlightening. In Margaret Lucca v. Wells Fargo Bank, N.A. the bank was sued for failing to report to adult protective services a customer’s wire transfers of hundreds of thousands of dollars to Jamaica that turned out to be an elder abuse scam.

In this case, Margaret, and elderly customer of Wells Fargo, sent numerous wire transfers that turned out to be the result of a fraud, an elder abuse scheme. Bank personnel reported the transactions to an internal fraud department, but that

department failed to report the transactions to law enforcement agencies or to the county adult protective services.

The heirs of the defrauded customer sought to hold the bank responsible for having failed to report these transactions under a New Jersey statute, which permits financial institutions to report suspicious financial transactions. The court held that the statute was enacted to protect financial institutions from claims that they  violated a customer’s right of financial privacy if they chose to report such matters.

The statute, the court held, was permissive and protective of the financial institutions, and did not mandate reporting, but rather protected an institution if it did report an incident. Therefore, the financial institution could not be held liable to report under that statute. While the holding in this case seems to be a logical if not obvious reading of the statute, the implications of the case and matters discussed in the opinion may have far greater import to the future of estate planning.

Margaret’s estate plan may have been less than optimal. Instead of owning the accounts outright in her name, had she instead used a funded revocable trust naming Wells Fargo as a trustee (thus in a fiduciary capacity), the institution may well have been liable, as it would have been held to a higher standard of care as opposed to simply a custodian of her money.

More important than being liable, the institution would have likely been responsible in that capacity and would have more closely monitored financial transactions as a trustee. A trustee would notice a wire transfer of such amounts to Jamaica. Even if the initial abuse was missed, it would have more likely been identified and responded to more quickly.

Perhaps another step was warranted as well. As clients age, hiring a care manager as an integral part of the planning process may serve to avert potential elder abuse.  Hiring a care manager isn’t common today, but I believe will become more common as baby boomers age and retire.

A care manager may have identified the vulnerability of the client and alerted an institutional trustee, family member or others to take action. Care managers, unlike all the other members who comprise a traditional estate planning team for elderly clients, are mandated reporters. They must report suspected abuse. The same statute that absolved Wells Fargo of liability mandates that care managers and certain other categories of persons must report suspected abuse.

Had Margaret’s team of advisors recommended a care manager, perhaps the elder abuse would not have arisen. There was no oversight or monitoring of the client’s financial activities. We can begin to think of CPAs as more than tax return preparers for example. Had a CPA been involved to write up periodic reports the abuse may also have been identified earlier and addressed.

Appropriate checks and balances are a key to safeguarding aging clients, but in the past have not been viewed as being within the scope of traditional estate planning. The Margaret Lucca case should not be viewed as merely a limitation on the liability of financial institutions, but rather a call to use more robust and comprehensive planning that extends well beyond mere document preparation (e.g. a durable power of attorney), tax planning and the steps that have traditionally been viewed as constituting estate planning.

Disability Trustee

When considering who will serve as the successor trustee to your revocable living trust, it’s likely that you’ll first think about who will be serving upon your demise. This jumps over the important but often overlooked office of disability trustee.

Your disability trustee, by definition, will manage your trust assets during a period of disability. That period may be short term, such as if you have an extended hospital stay, afterwards you take back the office of trustee; or the period could be long term, as in a situation where you contract dementia or Alzheimer’s disease and could therefore last from the initial period of disability until your death.

When accepting the office, your disability trustee will likely be thrust into managing your investments, paying your bills, deciding which of your assets are best used to do so, and may even bear the responsibility of selling your home if it becomes necessary or prudent due to prolonged illness.

This means that your successor trustee will need to know what assets you own, who your financial, tax and legal advisors are, and be responsible in making timely decisions.

Before we delve into these various aspects, let’s first consider whether your revocable trust adequately defines just when you should no longer act as your own trustee, bringing in your disability trustee.

Defining Disability

Many revocable trusts simply make a conclusory statement indicating who your successor trustee will be without defining exactly when it is that you are to be considered disabled. My unique estate planning process, The Family Estate & Legacy Program™  takes care of these issues by clearly defining disability inside your trust document.

It should come as no surprise that “disabled” is a subjective term, subject to interpretation. Consequently, of the trusts that do define the term, many rely on a physician’s statement. A physician qualified in determining mental capacity, usually a neurologist, is called upon to issue an opinion as to whether whomever is acting as trustee has the requisite capacity to carry out the normal day to day activities.

Kevin, a son of one of my longtime client, Jerry, called my office. “Craig, we have a problem,” Kevin began, “I’m down from Michigan and when I arrived at Dad’s condo there was a pile of unopened mail. Bank and brokerage statements, unpaid bills and all sorts of things. I asked Dad if it was okay for me to go through it, and I found that he had written a $10,000 check to the housekeeper! He clearly made out and signed the check, but when I asked him about it he had no recollection.”

I suggested that Kevin take Jerry to a neurologist. The doctor later confirmed Stage 3 Alzheimer’s disease. We then proceeded to initiate The Family Estate & Legacy Transitional Event Sequence™ replacing Jerry as his own trustee with Kevin, who was named his successor disability trustee.

When you become a financial danger to yourself, then it’s time for your disability trustee to step in. The problem is that most of us won’t admit when we’re not making wise choices any longer, and are often unwilling to give up the reigns. Compound this with physicians who are fearful of liability and are becoming less likely to sign any document that would remove a patient from acting as trustee, and you have a potential stalemate situation.

One effective means of dealing with this situation is to name a disability committee whose purpose is to remove any trustee from acting. While the committee would certainly want a physician’s opinion as to the trustee’s condition, such a statement is not necessary. A majority vote of the committee could remove the acting trustee.

Sometimes trustees won’t agree to visit with a physician for an assessment. The trust document could address this situation by deeming the trustee incompetent if he won’t agree to a checkup. There are all sorts of ways to deal with this problem, and it’s preferable if you and your attorney discuss these issues ahead of time and include appropriate language so that you or any trustee that follows you won’t become a financial danger to yourself or to the other trust beneficiaries.

Occasionally a client will express concern that the parties who he names on a disability panel will remove him unnecessarily. I have a few responses: First, hopefully you name individuals who love you and who you trust, or some combination. You can include your attorney, CPA or financial advisor with your spouse and children, for example. Second, you are always in control of your trust. If you are improperly removed as your own trustee, then you can always amend the trust and name yourself in that office again. Third, I offer anecdotal evidence that in my 27 years of practice I am unaware of any committee that removed a client as his own trustee too early, although I can point to several instances of the removal coming a bit too late.

In short, take the time to discuss who may serve as your disability trustee with your estate planning attorney. Don’t skip over this most important office without much thought.

I want to protect inheritances for my spouse or children…

I want to make sure my estate plan is set up so that my future beneficiaries’ inheritance doesn’t fall prey to adverse circumstances.

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Florida Homestead Descent and Devise

In addition to the annual savings, claiming Florida homestead entitles you to a cap on the annual increase to your home’s assessed value. Even if the value of your residence exceeds a 3% increase, the appraiser’s office can only increase the value by 3%.  Over the years, the “Save Our Homes Property Tax Assessment Cap” can save thousands of dollars.

Today, however, I wish to discuss a lesser-known consequence of Florida homestead. This has to do with the “descent and devise” rules found under Florida’s Constitution and our statutes.

Simply stated, if your spouse and/or minor children survive you, you cannot devise your home (through your will or trust) to anyone other than your spouse. If you devise the homestead to any other person or entity then that devise is invalid.

Assume, for example, that you and your spouse purchased your Florida home before you became a Florida resident. In order to “balance out” your estate for federal estate tax purposes (necessary under the old estate tax laws but different since portability implemented in 2012) your attorney up north may have advised to place the Florida homestead in one spouse’s trust and the northern residence into the other spouse’s trust.

The trusts probably contain “credit shelter” and/or “marital trust” provisions for the surviving spouse. Even if the trust of the deceased spouse continues on for the surviving spouse, and if that trust owns the Florida homestead, it is an invalid devise. The devise may have been perfectly fine the day before you became a Florida resident, but once you claimed Florida residency, this problem arose.

When an invalid devise exists, then Florida law does not care what your will or trust says about who is to inherit your homestead.  Instead, your spouse may choose between a “life estate” interest in the home or an undivided ½ interest as tenants in common. The rest of the interest of the home is owned by the decedent spouse’s children.

What this means is that the surviving spouse cannot sell the home without the consent of the children, and the children must agree as to the sales price and will share in the sales proceeds. If any one of the children do not consent to a sale or transfer, then it cannot occur. Further, if one of the children has an economic, tax, creditor or divorce issue then the title of the home may become clouded.

Obviously, an invalid devise should be avoided. An update of the estate plan to Florida documents and Florida law is the first step. Sometimes more advanced planning is necessary. Take, for example, the circumstance where husband and wife are in a second marriage, each with children from a prior marriage. Wife owns the home, but if she predeceases husband she wants him to remain in the home rent free for the rest of his life, but also wants the equity of the home to one day benefit her children and not his.

Wife may even want husband to have the opportunity to sell the home and reinvest the proceeds into a new home of his choosing, so long as the equity of the original home ends up with her children.

In order to satisfy wife’s intent, it will be necessary for husband and wife to enter into a valid nuptial agreement waiving the Florida Constitutional and statutory homestead descent and devise rights. Under Florida law, such a nuptial agreement will require each party to have separate legal counsel, as well as full disclosure of their assets, even though the parties presumably don’t wish to waive rights to each other’s assets.

Once the husband and wife satisfy the nuptial agreement/waiver requirement, then wife can direct her attorney to draft an appropriate residential property trust within her will or trust documents.

This is but one example of how the Florida descent and devise laws affect the disposition of one’s homestead.  If you own Florida homestead and haven’t updated your legal documents, it may be time to visit with a qualified estate planning attorney to discuss these important issues.

The Perils of Joint Accounts

I hear this question all too often.  A client will come in, thinking they have a great solution, and propose, “Should I put my bank and brokerage accounts in joint name with one or all of my children?” In almost all cases the answer is an emphatic “No!”

First and foremost, when you title an account in joint name with someone else you are actually making a gift of half of its value. So if Ethel puts her brokerage account worth $1 million into joint name with her daughter Francoise, she just made a gift of $500,000 to Francoise (half of the value of the account).  Because the most anyone can gift tax free is only $15,000, titling an account worth more than $30,000 would require the filing of a federal gift tax return. In my example, Ethel would have to file a return that would either reduce her gift and estate tax exemption, or if she’s already used up her exemption she may actually have to pay gift tax.

Second, if Ethel’s daughter Francoise is experiencing any legal or financial problems, Ethel may have put her account at risk. If Francoise is going through a divorce, for example, a forensic accountant may discover the asset and it might be at jeopardy depending upon circumstances. The same holds true if Francoise has creditor or bankruptcy problems.

Third, titling the account jointly will likely thwart Ethel’s estate plan. Assume that Ethel has a will that says that upon Ethel’s death all of her assets are to be divided equally between her three children.  If the account is titled jointly with rights of survivorship with Francoise, Francoise would inherit the account outright despite Ethel’s contrary intention in her will. Even if the account is held jointly as tenants in common, Francoise owns half of it and the other half would be distributed in thirds according to Ethel’s will.

Francoise might be altruistic and wish to share the account equally with her siblings. But she might have a gift tax problem herself. If she tries to divide the account that she legally owns, she is making a gift in excess of the $15,000 annual gifts that she can give tax-free.

Fourth, accounts owned jointly do not enjoy the full “step-up” in tax cost basis that would otherwise occur. Assume that Ethel owns 1000 shares of ABC Company Stock that is worth $100 share but she paid $10/share many years ago. If Ethel sold all of her shares she would recognize a $90,000 capital gain. But if Ethel dies still owning the shares, her children inherit them at the date of death value for tax cost basis purposes. So if her beneficiaries sold the shares shortly after her death for the $100,000 there would not be any capital gain and therefore no capital gain tax to pay.

But if Ethel places the account in joint name with Francoise during Ethel’s lifetime, on Ethel’s death Francoise only gets a one-half tax cost step up. In this case, Francoise would recognize a $45,000 capital gain if she sold the shares for $100,000. ($100,000 sales price less $5,000 basis in half the shares and $50,000 basis in the other half of the shares).

Hopefully you are convinced that placing assets in joint name with children isn’t a good idea. So what should you do if you want your child to be able to transact business on your accounts – particularly if you become disabled and unable to manage your own affairs?

This is where revocable living trusts really shine. Ethel can create a revocable living trust and name herself as her initial trustee but also name Francoise as her successor trustee in the event of a disability. Francoise can then transact business on all of Ethel’s accounts that the trust owns. It is not a gift to Francoise since she is acting as a fiduciary for her mother. On Ethel’s death the trust avoids probate and rightfully distributes the accounts to all of Ethel’s children (if that is her wish).

Another alternative is a durable power of attorney. Ethel can sign a durable power of attorney that would name Francoise as her attorney-in-fact to transact business on all of Ethel’s accounts. You should know that the Florida law governing durable powers of attorney changed significantly back in 2011. If you have a durable power of attorney created before that date, you should consult with your estate-planning attorney to determine if yours needs updating.

The bottom line is that you shouldn’t put accounts and assets in joint name with your adult children. There are reasonable alternatives that don’t carry all of the disadvantages associated with joint accounts.

Trust Creditor Protections


Are the assets in your revocable trust outside of the reach of your creditors?  During your lifetime, the answer to that question is “No.”

Many clients mistakenly believe that by creating a revocable living trust, they protect their assets from the claims of divorcing spouses, predators and creditors. This isn’t the case. When you transfer assets from your name into your revocable trust, you are merely changing the form of ownership. Because you are the grantor of the trust, you are deemed to own it. You can freely change the terms of the trust whenever you want, and can control the disposition of the trust assets, so the assets of the trust are still considered yours.

Revocable trusts generally use your social security number as the tax identification number, so there’s no separate income tax return to file as long as you are alive. All of the income of the trust appears on your federal Form 1040 just as it always has.

Because assets inside of your trust remain yours legally, the trust does not shield you from liability.

This came to light recently when a client was involved in a tragic accident that involved killing a motorcyclist while driving her car. Because she was retired, she had cut expenses, limiting her automobile insurance coverage to 100/300/50, meaning that she had coverage of $100,000 bodily injury liability insurance per person, $300,000 total bodily injury liability insurance per accident, and $50,000 property damage liability per accident.

Moreover, she had dropped her umbrella insurance policy. Umbrella insurance is extra liability insurance that stacks on top of your home, auto and boat coverage. It is designed to help protect you from major claims and lawsuits. As a result, it helps protect your assets and your future. A $2 million umbrella policy, for example, will provide additional coverage above the limits of those policies. Generally speaking, you must increase your home, auto, and boat coverage to the maximum limits when purchasing an umbrella policy.  For most people, umbrella policies are very affordable.

Our client’s auto insurance wasn’t adequate to cover the losses associated with the accident. This meant that her other assets, including those assets funded into her revocable trust, were at risk in the negligence lawsuits following the incident. The lesson to be learned is to carry adequate insurance, and if you have any degree of net worth, even if you are retired, it makes sense to carry an umbrella insurance policy.

When you die and leave continuing trusts for your spouse, children or beneficiaries, however, you can build those trusts to provide protections from creditors and predators. This is because your trust is no longer revocable. Once you pass away, your trust becomes irrevocable.

If you wish to protect the inheritance you leave your loved ones, then you may build a testamentary (after-death) trust inside of your trust.  In order to offer the best protection, you would make the income and principal distributions discretionary as opposed to mandatory, and you would not name the beneficiary of the trust as the sole trustee. Distributions would have to be approved by an independent trustee to provide the maximum protections.

Assume, for example, that you leave assets in a testamentary trust for your daughter Brenda. You would like Brenda to control the investment and distribution decisions during her lifetime, so you name her as the trustee. You are concerned, however, because Brenda isn’t all that experienced handling money and has had problems with credit cards.

In this case, you may want to name a bank, financial firm, or trust company as Brenda’s co-trustee so that she has professional money management and some level of protection over any creditors that she may have. By making the trust distributions discretionary, if Brenda had any outstanding judgments the trustee can withhold distributions that the judgment creditor otherwise may be entitled to.

Whenever naming a bank, financial firm, or trust company as a co-trustee, you should consider allowing Brenda or someone else close to her the ability to remove and replace the corporate co-trustee. This way, Brenda isn’t married to any one particular financial institution.

By naming an independent trustee that can withhold trust distributions, Brenda would not have access to the trust funds during a creditor problem, but would also put her legal team in a better position to negotiate the debt with the creditor, perhaps settling for pennies on the dollar. Or, in a worst case scenario, Brenda may consider bankruptcy proceedings to discharge the debts. Once those debts are satisfied, then the trustee could resume distributions to Brenda or for her benefit.

If, however, you left the inheritance outright to Brenda, or if you named Brenda as the sole trustee of her testamentary trust, then her inheritance could be at risk.

I hope this gives you a better understanding of the differences as to the levels of asset protection between a revocable trust that benefits the grantor during his or her lifetime, as opposed to a testamentary trust that springs into effect upon that grantor’s death.

Qualified Plans into Testamentary Trusts

“Carmen” had a daughter “Julie” who had disabilities and was on Medicaid among other government programs. When Carmen prepared her estate plan, she told her attorney about Julie’s disabilities and government benefits. As opposed to Medicare which most retirees are eligible for, Medicaid is a government health care program for those without money or income. In fact, an individual must have less than $2,000 of assets and may only have income of $2,094/month in order to so qualify. Any amounts above that would usually disqualify the recipient from receiving Medicaid benefits.

So Carmen did not want the amounts that she was leaving Julie to disqualify Julie from receiving her Medicaid benefits. Carmen’s estate-planning attorney did an excellent job drafting a Special Needs Trust naming Julie as a beneficiary after Carmen’s passing.

Special Needs Trusts (also known as Supplemental Needs Trusts) are designed to provide for those “extras” or necessaries that the government may not provide for, while at the same time not disqualifying the beneficiary from receiving much-needed government assistance. Those extras might include a single room in a care facility as opposed to a double room, a home, automobile, travel to visit relatives or even some prescription drugs.

While the attorney drafted an excellent trust, he did not consider something very important. Most of Carmen’s assets were in the form of IRA accounts. When Carmen withdraws money from her IRA account, the amount withdrawn is taxable income to Carmen. When Carmen dies naming Julie’s Special Needs Trust as the beneficiary, a number of serious tax problems arise.

First, the beneficiary of an IRA (who is not the spouse of the deceased) following the account owner’s death will have Required Minimum Distributions (RMDs) even if the beneficiary is not yet 70½ years old. Although in general the beneficiary may stretch out the RMDs over the beneficiary’s lifetime.

When a trust is named as the beneficiary, however, there are special IRS rules that must be met for the trust beneficiary to be considered the beneficiary of the IRA enabling the “stretch out.” These are known as the “identifiable beneficiary” rules. If all five of the identifiable beneficiary rules are not met, then the inherited IRA will generally distribute all of the assets in the year following the account owner’s death into the trust.

Special Needs Trusts, because they accumulate income, generally do not qualify the beneficiary as “identifiable.” So Carmen’s IRA would have distributed the entire account balance to the trust at Carmen’s death. This is a bad result since it results in the recognition of all of the income and hence the payment of the income tax, plus Julie lost all of the potential tax deferred growth over the course of her lifetime.

But this isn’t the end of the bad news. Since the Special Needs Trust is designed to hold all of the money that came into it, and only disburse it for those items that would not disqualify Julie from receiving Medicaid benefits, it accumulates all of the taxable income rather than distributing it. Testamentary (after death) irrevocable trusts (like the special needs trust) that accumulate income subject that income to a compressed income tax rate schedule. What this means is that to the extent that the distributions exceed $12,000 of taxable income, the highest marginal income tax bracket (39.6 percent) applies. Further, an additional Affordable Care Act (Obamacare) Medicare surtax of 3.8 percent would likely apply, resulting in a whopping 44.4 percent of the IRA benefits being lost to Uncle Sam in the year following Carmen’s death.

There are methods to plan around this potential disaster, and fortunately Carmen did amend her trust and therefore Julie will be well taken care of. This true story illustrates the importance of considering not only the legal aspects of estate planning, but the income tax planning aspects of the plan as well.

If a significant portion of your net worth is held in IRA or other qualified plan accounts, it behooves you to discuss the income tax consequences of your planning with a knowledgeable estate planning attorney.

Jeopardizing Creditor Proof Life Insurance

Under Florida law, life insurance is exempt from the claims of creditors. The exemption is rooted in public policy in the sense that when a person dies and leaves behind life insurance, that insurance is supposed to take care of a spouse and perhaps children. If creditors are first in line for the proceeds, then we might have many widows and children without any funds on which to live.

But sometimes the beneficial creditor protection of life insurance can be jeopardized. This is when the insured’s estate is named as the beneficiary. When your estate is named as the beneficiary to your life insurance policy, now it could be subject to the claims of your creditors since it is a probate inventory asset.

Allow me to provide an illustration of how this problem may arise:

Lisa owns a $500,000 life insurance policy on her life. She has two minor children. Knowing that minor children would need a court-appointed guardian to collect her life insurance, Lisa names her estate so that her personal representative could collect the life insurance proceeds at her death, and then hold those proceeds in a testamentary trust created under her will for the benefit of her two minor children until they become adults. When Lisa died, she had many medical bills that weren’t covered by insurance. The hospitals and physicians filed claims against Lisa’s estate, thereby consuming a good portion of the life insurance that Lisa otherwise intended to benefit her children.

The problem may also arise in another sense. Assume, for example, that Lisa never named a beneficiary to her life insurance. The default beneficiary under the life insurance contract itself is often the insured’s (Lisa’s) estate. This happens more often than one would imagine.

So what should you do when you wish to name minor children as beneficiaries to a life insurance policy in order to keep the creditor-protected character in place? The best way to deal with this issue is to create a trust that would become the beneficiary of the life insurance policy. The trust would then include the minor children as beneficiaries. Here, the trustee of the trust would be able to collect the life insurance proceeds, and distribute those proceeds creditor-free to the beneficiaries.

If the trust you create is irrevocable, then you have what is known as an Irrevocable Life Insurance Trust (ILIT).  In order to qualify the contribution of amounts to the ILIT in order to pay the premiums as gift tax free under the $14,000 annual gift tax exclusion amount, the beneficiaries must be given a “Crummey withdrawal right”. Generally speaking, after you contribute the amounts to the trust to pay the premium, the trustee must provide the beneficiaries (or their legal guardian) a 30 day window to withdraw their share of the contribution. The beneficiaries don’t exercise that right usually, since to do so would thwart the payment of the premium and consequently the policy would lapse.

You don’t necessarily have to create an ILIT in order to protect the insurance benefits. This may be accomplished through a revocable living trust, although you should work closely with your estate planning attorney to ensure all of the proper elements are drafted into the trust to provide the proper protection, and that the life insurance policy’s beneficiary provisions are properly completed.

Many of these same issues come into play when you leave life insurance to disabled beneficiaries or to beneficiaries that would squander the money. For those you will likely need a testamentary trust of some kind with a gatekeeper trustee.

The bottom line is to let your estate attorney know about any life insurance that you might own, especially if you have minor or other beneficiaries with special considerations.

I want to protect the inheritance for my grandchildren…

Assisting in the care of my grandchildren for their future is important.

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The In-Laws

When drafting up wills and trusts, I sometimes have a client tell me that they want to split their estate into shares for each of their children, but they don’t want the estate to benefit their daughter-in-law or to their son-in-law in the event of their spouse’s passing.  Instead, they would prefer that whatever is left of the inheritance go to their grandchildren.

The intent is perfectly reasonable.  If your son dies and his inheritance goes to your daughter-in-law who then remarries, it’s possible that your hard earned estate will one day end up with some other family that you don’t know.

When I get direction to bypass the in-laws, I often ask my client if they are talking about what would happen if their son or daughter predeceases or if they are talking about a situation where their child survives my client and then dies.

“What does this matter?” is a response I often hear.

“Well, let’s say that your son survives you,” I begin. “If you leave his share of the estate outright to him, then he owns it and can leave it to whomever he wants. If his will gives everything to his wife, then she’s likely to inherit what you left him.”

“We love our daughter-in-law,” my client responds, “but what if she remarries and leaves everything to some new husband? We don’t want that. We’d prefer that our grandchildren receive what’s left.”

“In that case you shouldn’t leave everything to your son outright, instead you should leave it in a continuing trust for his benefit,” I add.  “You can make him the trustee of his own share, but instead of it being subject to his will, you could add a provision that, if he dies, if there is anything left of the share, then it goes to benefit your grandchildren. That way you give him control as trustee and as primary beneficiary, but you can direct it at his death rather than giving his will complete control over what you left him.”

Before the client concurs and instructs me to do just that, I throw something at them that they probably didn’t consider.

“If you leave the assets in a continuing trust, you might want to give your son a power of appointment over the assets so that he can direct who gets them in his will.”

“Why would we do that? Then we’re right back where we started! If he gives everything to his wife, then what’s the point of creating a trust share for our son that would go on to our grandchildren?”

“That’s a good question,” I say. “But consider this – what happens if your son hits hard times economically and dies unexpectedly? There might be considerable sums held in trust for the grandchildren, leaving their mother destitute. You wouldn’t want that either would you?”

“Probably not.” The client says. “So what do we do?”

“A power of appointment does not have to be an all or nothing proposition,” I’ll advise. “You could give your son the power to appoint some portion of his share, but it must be appointed into a trust for his wife that continues for her lifetime. In other words, you could limit how much of his share he can redirect away from the grandchildren (who would be the default beneficiaries) and to his wife, but you can also ensure that upon her death it goes back to your bloodline.”

The power of appointment might say something along these lines:  “I grant to my son the limited power to appoint up to half of the remainder of his trust share to his wife, provided that he exercise the power in such a manner as to direct such sums into trust paying his wife income for her life and then the remainder of the share at her death will revert to my grandchildren.”

I explain that the actual wording of the will would be far more legal in nature, but that would be the gist of it.

While it’s easy to simply go with default language that would distribute all of a deceased son’s share to that son’s children, that might not be the right thing to do, especially when your child is in a long term marriage and your grandchildren are of that marriage. Every family’s situation will be different, so it is important to consider the ramifications of your default beneficiaries should something unexpected happen.

Does Generation Skip Mean Your Children Aren't Beneficiaries?

I’m guessing your estate plan eventually leaves all of your hard-earned wealth to your children in one form or another. Unless, of course, you’re someone who drives around with the bumper sticker “I’m out spending all of my children’s inheritance!” There’s nothing wrong with that of course.

When you leave amounts in continuing trusts for your children, whatever is left in those trusts upon your children’s deaths may end up benefiting your grandchildren. In that case, the trusts are usually drafted to consume something known as your “generation skipping transfer tax exemption.” When a trust is generation skipping transfer tax (GSTT) exempt, it will never be estate-taxed again, even if it grows to enormous sums and continues on for generations.

Note that in my example the children weren’t skipped as beneficiaries. The GSTT exemption speaks to a “tax shield” covering the assets in the trust such that as each generation passes away, the federal government cannot impose an estate tax. Think about the Kennedy family compound in Hyannisport or the Bush family compound in Kennebunkport. Both have been with their respective families for generations and likely have great value. The reason those compounds remain within the families is because they are likely held in generation skipping tax exempt trusts.

To understand what the generation skipping tax is, you first have to understand that it is a “transfer tax” like the gift and estate tax. You may be aware of your approximately $11 million federal estate tax exemption. You can leave that large of an estate to anyone of your choosing without the imposition of federal estate tax. That estate tax is a tax on your balance sheet at the time of your death. It is a tax on the net equity that you possess. It has nothing to do with income taxes.

If you make a taxable gift during your lifetime, generally defined as a future interest gift or a present interest gift, in excess of $15,000 to any beneficiary during a calendar year, then you decrease your total transfer (gift and estate) tax exemption from that $11 million amount. So if I make a taxable gift of $100,000 during 2017, then I have $5.39 million of exemption remaining upon my death.

The generation skipping transfer tax is an additional tax imposed on top of the estate tax. It is imposed on either direct skips or skips in trust that either terminate or distribute to a beneficiary more than one generation below you (grandchildren being the most prominent example). Back in 1976, Congress noticed attorneys leaving amounts in continuing trusts for many generations, so they added the GSTT in an effort to limit the amount of assets that could be placed in continuing trusts without those assets ever being subject to estate tax again.

The GSTT is imposed at the highest estate tax rate (currently 40%) after the estate tax has been calculated. The exemption is the same amount as the federal estate tax (currently $5.49 million).

So if I have neither estate tax exemption remaining nor any GSTT exemption remaining at my death, and my estate bequeaths $1 million to my grandchildren, then the first 40% ($400,000.00) pays the estate tax leaving $600,000.00. Since that $600,000 is designated to my grandchildren, assuming that I have already consumed all of my GSTT exemption, then another 40% GSTT is applied ($240,000.00), leaving my estate with a net amount of $360,000.00 of the original $1 million for my grandchildren. So you can see how the GSTT is extremely punitive in nature.

The concluding thoughts about all of this is that you would generally want to leave amounts in continuing GSTT exempt trusts for your children to the extent possible. Those trusts serve to protect the inheritance from creditors, predators and divorcing spouses. They can even be drafted to give the child control as trustee of his or her own trust share.

If you have an estate large enough that would trigger GSTT, if you left it either in trust or otherwise that would eventually distribute to or for the benefit of that next generation below your children’s, then you want to do something to make sure that those non-exempt amounts are included in your children’s estate for estate tax purposes. That way no GSTT would be due to the government.

This can be accomplished any number of ways. One is to have an outright distribution to your children of the amounts that would not be exempt from GSTT. The other is to include the trust amounts in your children’s estates by giving them something known as a “general power of appointment.” There are also “intentionally defective general powers of appointment” that you could use that serve to limit the class of beneficiaries that could end up with the trust funds.