In preparing estate plans, I have found that some clients have a number of questions about various clauses included in their documents. At the other end of the spectrum, some have very few or none. Most are somewhere in the middle. Some clients absorb information best through in-person conversations, while others like to see written explanations. Some just need a little more information in order to ask the right questions. Here are some pointers about various clauses and procedures that may be included in an estate plan. These are designed to be educational as well as thought-provoking about the estate planning process, particularly in the area of living trusts. Although not intended to cover every possible clause, this list should serve as a good starting point for consideration and discussion.
Part 1 - Some General Points
Naming the Trust
Trustees are sometimes asked to provide a third party, such as a bank or lender, with the name of the trust. A trust can have any name that is desired, just as a person can choose any name he likes, so long as it is not chosen or used for an improper purpose. I normally include a provision that gives the Trustee the authority to choose the name, and different names can be used for different purposes, such as "The Jones Family Trust" for one purpose, but "The Samuel and Mary Jones Revocable Living Trust" for another purpose. Often it is advisable to include the original date of the trust in the name, as it helps to distinguish one trust from another. But, just as a person can choose a name that is identical to someone else, a trust can have the same name as some other trust. A similarity of names may require further identification to distinguish one trust from the other, but this happens all the time with individuals as well.
The words "Trustor" or "Trustors" mean the person or persons who create the trust by transferring assets into the trust. Other words that mean the same thing are "Settlor" or "Settlors." The words "Trustee" or "Trustees" refer to the person or persons who hold title to the property of the trust and who are responsible for managing and distributing the assets in accordance with the terms of the trust. A Trustor may also be a Trustee and usually is.
To facilitate the signing of documents, I have maintained my notary certificate for over 20 years. It is much easier to have the notary work done at the same time that the documents are signed and not have to arrange for notarization later. There is no legal requirement that a trust be notarized. However, many third parties, such as transfer agents, like to see the notarization, and it facilitates the course of administration to have it done.
I normally have clients sign their important documents in at least two sets, each of which is an original. These are referred to as "duplicate originals" and can prove very useful when one of them becomes lost or accidentally destroyed, particularly in the case of wills. The California Probate Code provides that, if an original will was last known to be in the possession of the person who signed it and cannot be found, it is presumed to have been intentionally revoked, unless there is a duplicate original. It is not that unusual to be unable to find an original will, especially when the person signing it has to be moved to an assisted living or similar facility. On these occasions there is usually a major cleanout of the previous residence by the children or other persons who are involved in arranging the move. I normally advise clients to keep these sets in two different places, one of which is likely to be somewhat permanent, like a safe deposit box. The other can be a file cabinet or other convenient place for easy access whenever the need arises.
Attorney File Copy
I keep a file copy of client documents that I have prepared. These are not kept in a safe or locked facility and are for my own reference, not as a backup for the originals that are given to the client. However, I often have the client sign my file copy as well as their own. I have had instances in which clients have lost both of their own sets, but my file copy was available for use as an extra original. This is a rare occurrence, but it does happen.
Keeping it Simple
Given the choice, most clients would want their documents to be as short and easy to understand as possible, while still covering the areas that are likely to be relevant to them. Accordingly, I do not include every possible clause in every estate plan. Clauses that may be quite useful to one client may be just confusing and irrelevant to another. However, it is not always easy to make the decision whether to include a particular clause or not. It is sometimes advisable to include certain clauses that may not be needed currently, but may come in very handy at some future time.
Importance of Funding the Trust
The single most important thing that clients must do with their trusts is to keep their assets in the trust. Otherwise, assets that are not in the trust may have to be probated, the very thing a trust is intended to avoid. As part of the initial services in preparing the trust, I prepare and arrange to record a deed from the Trustor to the Trustee to any real estate. The client is also instructed to make sure, at all times, that all assets of any value are held in the trust. Typical reasons for problems in this area occur when, for example:
a)Property that was once in the trust "slips out." The client refinances a mortgage to get a better interest rate. Lenders often do not want to lend money to trusts. Those lenders instruct the title company handling the loan to prepare a deed to take the property out of the trust in order to close the loan in the name of the individual client. Unfortunately, however, they do not arrange for the property to be put back in the trust after the loan has closed. It is necessary for the client to make the transfer back to the trust on his own. I include a provision in the trust document that states the intent that such refinancing arrangements do not indicate any intent to remove property from the trust, but the only proper procedure is to record a new deed to put the property back in the trust as a matter of record.
b)New assets are acquired, the client forgetting to take title in the name of the trust.
c)Certain assets are not transferred soon enough. If the client is aware that he is due to receive an inheritance from some deceased person, the client should make an assignment of that inheritance to the client's trust and deliver the assignment to the person in charge of eventually making the distribution of the inheritance, so that it is distributed to the trust and not the client individually. If the client should die before receiving the inheritance, without having made such an assignment, the inheritance will not be in the trust and may have to be probated.
d)Certain assets are simply overlooked and never transferred to the trust in the first place.
When an attorney prepares an estate plan for two or more persons as joint clients (usually a husband and wife), one of the first things he should do is have them approve a letter that explains the concept of a potential conflict of interest. This conflict can arise because the attorney owes certain duties to each client that can conflict with each other. One such duty is that of loyalty, which includes the duty to inform the client of any facts that are relevant to the client's affairs. Another is the duty of confidentiality, which requires the attorney to avoid disclosing any of the client's legal affairs to anyone else without the client's approval. So if one joint client discusses a relevant matter with the attorney, together with a request that the attorney not discuss it with the other joint client, a conflict immediately arises, and the attorney is in an impossible position. My conflict waiver letter provides, among other things, that, as between the joint clients, there are no confidential communications, and the attorney is obliged to disclose everything of importance that either joint client says about the engagement to the other joint client.
Part 2 - Some Provisions to Think About
The great majority of trusts are specifically declared to be revocable when first created by the original Trustor or Trustors. When there are two Trustors, the interest of the first Trustor to die may then be made irrevocable, or it could be made revocable by the surviving Trustor, depending on the objectives of the Trustors. If the interest of the first Trustor to die is revocable by the surviving Trustor, then only one trust continues in existence and is completely controlled by the surviving Trustor. For tax planning purposes, however, it is often advisable to establish two trusts on the first death, and that approach requires that the interest of the first Trustor to die become irrevocable on the first death. A person with the power to revoke a trust also has the power to amend it. For tax reporting purposes, all the income and deductions of a revocable trust are reported directly on the tax return of the person with the power to revoke.
It is normal to provide for a Successor Trustee who is authorized to serve when the original Trustee has resigned or died. I usually provide that, whenever a successor is needed and no one named in the trust is available, the Trustee who is serving is authorized to specify his or her successor. This can save time and expense, since the alternative would be to request the probate court to name a successor. Not only are there court costs and legal fees in arranging for such a court appointment, but the court will typically require the successor to post a bond, at more expense for the trust. When the succession is established in the trust without court involvement, the bond requirement can be avoided. Another useful clause provides that a bond shall not be required even in the event of a court appointment, unless specifically requested by a beneficiary.
Trust law allows numerous techniques to accomplish client objectives. One such technique is the use of a "Special Trustee." A Special Trustee can be given either very broad or very limited powers, such as just signing checks on a particular account, while the Trustee retains the authority to do everything else. I normally include a provision that the Trustee has the authority to appoint a Special Trustee for the purpose of accomplishing a client objective. The same objective can sometimes be accomplished by having the Trustee sign a Power of Attorney to an agent that authorizes the agent to act for the Trustee in accordance with the terms of the Power of Attorney. To be effective, the Power of Attorney must be worded carefully to confirm that the person signing it is acting as Trustee and is appointing the agent to carry out some action on behalf of the trust. Some third parties, however, such as certain brokerage firms, have a policy of not honoring a Power of Attorney unless the person signing it is disabled and unable to act for himself. However, such firms will normally honor the status of a Special Trustee who is appointed in accordance with the terms of the trust. Another advantage of using a Special Trustee over the Power of Attorney is that the death of the Trustor does not terminate the authority of the Special Trustee, whereas the death of the Principal does terminate the authority of the Agent under the Power of Attorney.
Trustees are also known as "fiduciaries," meaning that they have to meet very high standards of trust, confidence, and loyalty to the trust beneficiaries. Another type of fiduciary that can be named in a trust, in addition to the Trustee, is called the "Trust Protector." Very few trusts need such an additional fiduciary, but some can benefit a great deal from having one. A Trust Protector can be given any number of powers and duties that are not ordinarily held by the Trustee. For instance, a Trust Protector could be given the powers of a judge to settle controversies among any of the parties to the trust, both Trustees and beneficiaries. The Trust Protector could be given powers that a judge would not have, such as the power to reallocate the interests of the beneficiaries for whatever reasons might be specified. There is almost no limit, so long as the Trust Protector must act as a fiduciary and cannot use his powers to benefit himself or his friends or family at the expense of the trust beneficiaries. To be effective, a Trust Protector should be in a completely neutral position, without connections to the Trustee or the beneficiaries, and the trust should also provide that the Trust Protector is entitled to reasonable fees for services rendered. Areas in which a Trust Protector can be helpful are mentioned in various other places in this list. In most cases, a Trust Protector is not necessary. For some clients, however, the Trust Protector may be the ideal solution. Ideally, even if a trust provides for a Trust Protector, the services of the Trust Protector may never be needed.
Parents with two or more children sometimes feel that they have to name each child as a Co-Trustee at such time as the parents are no longer serving. Although each child may be capable, they do not always agree on how to manage the trust. When disagreements between Trustees are brought to court, the tendency is not to decide which side is correct, but instead to name a neutral Trustee and remove each of the children as Trustees. This is not the solution that the parents may have wanted. One way to deal with such problems is to provide that, at the request of either Trustee, a further additional Co-Trustee shall be appointed to break a tie vote. (For this idea to work, the trust must provide that a majority vote of the Trustees is binding on each of them.) This additional Co-Trustee can be named in advance by the Trustors or can be left to appointment by the court or some other process, such as appointment by a Trust Protector. It could also make sense to waive bond for this additional Co-Trustee unless requested by a beneficiary.
Bonds of Trustees
Unless waived in the trust or by unanimous agreement of all beneficiaries, a Trustee (other than a bank or trust company) is required to post a bond, to protect the beneficiaries in the event the Trustee causes a loss through breach of his or her duties. Normally I include a clause that such a bond is waived. The reason is that the Trustee is typically someone who is known to be trustworthy (or why would that person be chosen in the first place?), and the waiver saves the cost of the bond. However, in many cases it is a good idea to provide that a beneficiary be allowed to require a Trustee bond, at least as to that beneficiary's share of the trust. This can be a workable compromise whenever a beneficiary does not have full confidence in the Trustee, especially since the cost of he bond can be charged to the share of the beneficiary who requested it.
Many trusts are administered smoothly and with little or no friction between the Trustee and the beneficiaries. In some instances, however, certain beneficiaries may make life difficult for the Trustee and even other beneficiaries. Because the Trustee has many duties and is held to a high standard of loyalty, as well as having the duty to perform in a reasonably competent and prudent manner, a disgruntled beneficiary can often find several things to complain about. If any such problems are real possibilities, there are certain precautions that can be taken. One is the "no contest" clause that is a standard provision in nearly all trusts, in case a beneficiary decides to contest the trust document itself. Another precaution is a clause that authorizes the Trustee to charge certain expenses against the shares of particular beneficiaries whose conduct causes the expense in question. A beneficiary who challenges the Trustee in court and causes extra legal expenses may be dissuaded from bringing unreasonable accusations when he is made aware that the legal expense of the Trustee in defending against those charges will be allocated to that beneficiary's particular share, and not against the trust as a whole. Another clause that can protect the Trustee provides that the Trustee is only liable for acts that are in the nature of bad faith or involve a profit to the Trustee at the expense of the trust.
There are other precautions that can be taken to deal with a troublesome beneficiary, but in most cases the clauses mentioned above are sufficient. When a beneficiary is known to be trouble, a provision for a Trust Protector with specific powers to deal with such beneficiaries may be the best answer. As an example, a Trust Protector can be given the authority to reallocate beneficial interests whenever the Trust Protector deems it equitable to do so. If a beneficiary, with no justification, causes an undue amount of extra expense and grief to the Trustee and other beneficiaries, the Trust Protector could reduce the share of that beneficiary to compensate for the extra burdens he has caused. Also, the trust could provide that all disputes must first be submitted to the Trust Protector for resolution. If the Trust Protector decided that the court is the best forum to resolve a particular dispute, he could direct the parties to go to court.
Protection for Beneficiaries
In addition to troublesome beneficiaries, there can be troublesome Trustees. The law provides some safeguards to beneficiaries who suspect wrongdoing by the Trustee, such as the requirement of periodic accountings and reports of the status of the trust and fairly strict personal liability for breaches of the duties of the Trustee. An additional clause that I sometimes include requires a bond of the Trustee at any time requested by a beneficiary, the bond expense to be charged against the share of the beneficiary requesting it. Such a clause provides a balance between the interests of the Trustee and the beneficiary. The provisions I prefer for bonding of the Trustee, therefore, are to avoid a bond when not requested, but require it when specifically requested. If a beneficiary requests a bond and the Trustee cannot qualify for it, the Trustee should be replaced. In addition to these provisions, a Trust Protector, who can be helpful in dealing with troublesome beneficiaries, can also be very helpful to beneficiaries when the Trustee is not performing his duties properly. A Trust Protector can be given the authority to remove and replace a Trustee when the need arises, or suspend the power of the Trustee to make any further disbursements without advance approval. Such powers of removal or suspension can also be sought from an appropriate court, but action by a Trust Protector may be more quickly available than from the court (and less costly), and speed in such situations can be critical.
I often include provisions in a trust that direct the Trustee to provide for the care and treatment of any pets that are owned by certain beneficiaries and to charge the share of the beneficiary with the related costs. The trust provisions for the care of the pets may result in the extension of the term of the trust beyond the death of the beneficiary for the remaining life of the pets.
In almost every trust there should be provisions for alternate beneficiaries when a named beneficiary has died before he is entitled to receive his entire share. The trust will usually provide that if a beneficiary, such as a child of the Trustor, has died before the Trustor has died, then that child's share is to be distributed to his children (who are grandchildren of the Trustor.) It is preferable to also specify that the alternate beneficiaries (such as the grandchildren) will receive that share if the child dies within a certain period after the Trustor, such as 30 or 60 days or more. Otherwise, it might be necessary to probate that share of the assets in the estate of the child. This requirement also avoids any question of who died first when there has been a common accident in which both the Trustor and the child die together.
No Contest Clauses
There is a popular belief that a Will or Trust should contain a clause that provides for a gift of one dollar to any person who contests the Will or Trust. There are a few problems with this idea, however. First, there is no need to give the contestant one dollar. It is much better to specify that the contestant will receive nothing, thereby avoiding the need to get a receipt for the dollar in order to close the estate. Second, in order for the clause to be effective, the contestant must have something to lose. A family member who is given nothing in the trust has no extra incentive to refrain from bringing a contest if he gets nothing by not bringing it. How much should the possible contestant be given if he does not bring the contest? It all depends on the individual and the size of the share he might receive if the contest is successful, but it should certainly be enough to make the contestant think long and hard before bringing any contest. There are other complexities in the law relating to no-contest clauses and they should be drawn carefully.
Unless the group of chosen beneficiaries is fairly large and not likely to all be in the same place at the same time, a trust should include some alternate provisions in the event all of the named beneficiaries and their alternates are deceased. Favorite charities are often chosen for this purpose. Otherwise, in that case the assets would go to the closest remaining relatives, who could be quite distant, such as third or fourth cousins who never had any contact with the family. Or, if no other relatives can be found, the assets would go to the State.
It sometimes happens that beneficiaries who receive trust assets are minors or, even if adults, are not mature enough to sensibly use their share of the trust for their own benefit. To deal with such possibilities, it is usually advisable to provide that the share of such young beneficiaries remains in trust for their benefit until they reach a certain age. Many parents have the view that their children or grandchildren should have to reach at least age 35 before receiving their entire share. I usually suggest that the Trustee have some discretion in distributing sooner to beneficiaries who show the ability to manage their funds properly.
A fairly standard clause that I include in trusts is one that restricts the right of any creditor of a beneficiary to require the Trustee to pay the beneficiary's debts from the trust. Without such a clause, a creditor of a beneficiary could arrange for a judicial levy against the Trustee, just as the creditor could do against a bank account of that beneficiary. This clause also requires some care in drafting in order to continue the restrictions in effect until the beneficiaries have actually received their distributions.
Special Needs Beneficiaries
Special clauses are sometimes required to protect the interests of a beneficiary who is receiving governmental assistance. These clauses are sometimes called "Special Needs Trusts" or "Supplemental Care Trusts." Without such clauses, a government agency that has provided a beneficiary with assistance for basic living expenses could reduce or eliminate those payments on the theory that the trust is an additional resource that the beneficiary should use for his basic living expenses instead of the agency. With proper drafting, it is possible to arrange for distributions for the beneficiary that are in addition to basic living expenses and do not cause a reduction in benefits.
Protecting the Next Generation of Beneficiaries
In certain families there are considerations that may require special provisions fir protection against unexpected developments. For example, it may be advisable to make the interest of the first Trustor to die irrevocable at that time, so that the children of the first to die are reasonably sure of their inheritance on the death of the second Trustor. There are any number of reasons for taking this approach, such as in certain blended families and in families where there is some concern over the susceptibility of the surviving Trustor to third parties such as an unscrupulous faith healer or a conniving second spouse. These are very personal concerns of the clients. In most instances that I encounter, there is no likelihood of any such problem at all.
Powers of Trustees
The clauses in a trust that list the powers of Trustees can get unduly lengthy and deal with matters that are very unlikely to arise. The problem with listing only the obvious powers is that circumstances change over time, and a power that was useless when the trust was drafted could be extremely useful at some later time, possibly even after the death of the Trustor or Trustors. Although I include rather broad powers that could cover almost anything, third parties, such as title companies, often prefer to see specific authorization for the Trustee to engage in particular transactions, such a refinancing real estate. Therefore, I tend to resolve doubts in favor of including powers rather than excluding them, but it is easy enough to delete any that a client feels will never be needed. That is one of the reasons I keep the Trustee powers in a separate part of the trust, so that changing that part does not require changing the rest of the trust.
Part 3 - Rescue Procedures
When things do not go the way we would like, sometimes there are ways to deal with them that save the day. Here are some of the ways to recover from various problems. I compare them to fire extinguisher or parachutes. We hope they are never needed, but we want to have them in case they ever should be needed.
In some cases, it is still possible to avoid the probate of an asset, especially real estate, even when it was never deeded to the trust or was allowed to slip out of the trust, such as by refinancing. The procedure is called a Heggstad petition, based on the name of the case that first approved it. The theory behind the case is that intent is the key element in determining whether an asset is in the trust. In the Heggstad case, certain real estate was not deeded into the trust but was referred to in a schedule of assets attached to the trust. That schedule was considered sufficient proof that the property was intended to be included as a trust asset. Accordingly, the court was willing to make an order declaring the property to be a trust asset, thereby avoiding the need for probate. I make it a point to include language in the trust to confirm the intent that all possible assets are included in the trust, in order to increase the chances that a Heggstad petition will work if it should be needed. However, Heggstad petitions do require extra legal work and court costs, so they should not be considered a simple solution, although they are much more economical and time saving than a full probate.
Declarations for Transfer Without Probate (Small Estate Affidavits)
When personal property such as bank accounts or securities have not been transferred to a trust, and the Trustor is deceased, it may still be possible to arrange for transfer of these assets to the Trustee by using a Declaration or Affidavit under Section 13100 of the Probate Code, sometimes called a Small Estate Affidavit. There is a limit on the amount that can be transferred with this procedure, but it can be very handy when the value is within the limit (currently $100,000) and there is no other asset such as real estate that requires probate. For this procedure to have the best chance to work, the Trustor must also have signed a Pourover Will as described in the following point.
A Pourover Will is a Will signed by a Trustor that gives everything that may be subject to disposition by Will to the Trustee of the Trust. These should be a standard feature of any estate plan that utilizes a trust. In case there are assets that have not been transferred to the trust, the Pourover Will avoids the possibility that those assets go to different beneficiaries from those specified in the trust. When assets are not in the trust, it may be necessary to have a probate, unless a Small Estate Affidavit or similar device can be used, but at least the intent of the Trustor is carried out and the trust serves as the unifying document for the whole estate plan. Having a Pourover Will may also make it much easier to utilize a Heggstad Petition, since there should be no one who has any reason to complain about its use.
As time passes and the trust is no longer revocable, what seemed like a good idea at the outset may not be working as well as was originally intended. Changes in the circumstances of the beneficiaries, as well as changes in the law, can also create problems that were never anticipated by the Trustor. To deal with such situations, the law allows a court to modify a trust at the request of the beneficiaries. However, there are certain conditions to be met, and it may be necessary to appoint special guardians for minor or unascertained beneficiaries. Unless there is special language in the spendthrift clause to specifically permit modification, a court may refuse, on the ground that the modification could interfere with the purpose of that clause. A Trust Protector, however, could be given the power of modification under certain conditions, thereby saving the trouble and expense of going to court at all. Also, a special clause that spells out the wishes of the Trustor with respect to future modifications could make the whole procedure much more predictable and easier to carry out.
Part 4 - Taxes
Dealing with Uncertainty in the Tax Law
I have written a separate Article on the subject of the uncertainly created by the new estate tax provisions enacted at the end of 2010. As mentioned in the Article, flexibility in adapting to further changes that are almost certain to come has become an extremely important consideration. Married couples, while both are living, can adapt to changes by rewriting their trusts. The most troublesome issues arise when one of the spouses has died and the law then changes while the other spouse is still living. Depending on the direction and scope of the change in the law, it may be advisable to make major changes in the entire estate plan. One means of accomplishing such changes is in the provisions for disclaimer by the surviving spouse, but such disclaimers are only available for a period of nine months from the date of death of the first spouse to die. Other means for accomplishing such changes are in the provisions for modification, for broad administrative powers, and for an independent Special Trustee, with broad authority to accelerate certain interests and confer a power of appointment on the surviving spouse over certain trust assets.
Balancing Concerns About Estate Taxes with Concerns About Income Taxes
Traditionally, when drafting trusts, estate planners focussed on minimizing estate taxes and utilized language to keep certain assets out of the taxable estate for that purpose. When the estate tax exclusion was one million dollars, most married couples with assets likely to be even close to two million at the time of the first death were properly concerned with avoiding the estate tax that might otherwise be due when the second spouse died. To guard against or minimize that estate tax, they arranged their affairs to keep certain assets out of the taxable estate of the second spouse to die. (Typical language for this purpose eventually divides the trust into two or three subtrusts with names like "A and B" or "Marital and Bypass" or "Marital and Residual." For 2011 and 2012, however, the exclusion is five million dollars. (It is scheduled to revert to one million in 2013, unless some change is made before then. Most tax planners expect that the exclusion will remain at five million or possibly three and a half million. Of course, they are not certain, and that is one of the main reasons for the uncertainty that is discussed above.) As part of the planning for flexibility, however, it is advantageous to think of the income tax effects that may be expected. Typically, most assets that are included in the taxable estate of a decedent are given a new basis equal to their fair market value at the date of death. In many cases, though certainly not all, the date of death value of the main assets is higher than those assets cost during the decedent's lifetime, in which case the asset is said to have a "stepped-up" basis. When such assets are then sold, the higher "stepped-up" basis reduces the gain and related income tax that might otherwise occur because of the sale. In these cases, it is advantageous to make sure that certain assets are included in the taxable estate whenever there will be no estate tax anyway, because of the high exclusion that is expected. By carefully utilizing the provisions discussed above for dealing with uncertainty, it should be possible in many cases to arrange things so that income taxes are saved, as well as estate taxes. As a bonus, these clauses may also be helpful in saving income taxes in some cases when the original concern was not to save estate taxes, but to protect next generation beneficiaries, as mentioned above.
Community Property and Separate Property
For Trustors who are married, the question sometimes arises whether certain assets in their trust are community property or the separate property of one of them. A typical provision in many trusts is that the transfer of property to the trust does not change its status from separate to community or community to separate. Whatever it was before being transferred to the trust is what it will be once it is in the trust. Of course, if there was uncertainty as to the status of the property before it was transferred to the trust, that same uncertainty will apply to its status in the trust, unless certain steps are taken to resolve the question. Because the status of property can have major tax consequences, and also make a difference in providing protection from creditors, I always prepare a separate document that constitutes an agreement between the Trustors as to the status of property that they hold in their joint names. The assumption is that if they have both names on title to an asset, they intend it to be their community property. If they hold an asset in the name of only one of them, it may still be community property or separate property, unless they somehow specify that it is one or the other. Some agreements provide that all property owned by either spouse, in whatever name held, is community property, on the assumption that community status will be more advantageous from a tax standpoint by "stepping up" the basis of the assets on the death of the first spouse. That approach, however, does not always work, because certain assets can go down by the time of the first death, resulting in a "stepped-down" basis instead. Accordingly, I believe that flexibility in this area can be a major benefit, just as it is in other areas. There is no reason that married Trustors cannot agree from time to time that certain assets in their trust are community or separate property and switch the status back and forth as circumstances change. Therefore, I am including provisions in certain documents that make it easier to make such changes.
Other Tax-Driven Provisions
For some clients, there are other tax concerns to think about besides the estate tax and income taxes. There is a tax called the "Generation-Skipping Tax" that will typically apply when assets are given to grandchildren instead of children. (Maybe the children have all they want or need already.) As with the estate tax, there is a five million dollar exclusion from this tax for 2011 and 2012, but scheduled to change to one million in 2013 unless some change is made in the law. To minimize the possible impact of such a tax, it is common to include some provisions that further divide a share of the trust into identical shares, only one of which makes use of the exclusion and the other does not. Distributions to grandchildren can then be made from the share that uses the exclusion, while distributions from the other share are made to children or other beneficiaries who do not cause any problems with this tax. When clients have IRA or 401-K accounts that become payable to their trusts, I like to include provisions that provide some help in insuring that such accounts can be kept going for as many years as possible, in order to avoid an unusually high payout in a short time that is taxable at ordinary income rates.
Part 5 - Conclusion
The foregoing list does not attempt to cover every possible issue that may arise in drafting an estate plan, but I hope it serves its objective of providing a good starting point for reflection. Some clients need many complicated provisions, while others need only the basics. For still others, a very simple trust, but with just a few special provisions, may be exactly what they need. There are some people who want simplicity above everything else. A good estate planning attorney should be able to help almost any clients by answering their questions and creating an estate plan that is tailored to their individual needs.