Why Is an Estate Plan Important?

There are a number of legal steps necessary to prepare your estate and your family for the future, including the use of a living trust. What is a living trust, and what kind of protection does it offer? The article “An important part of protecting your assets and those you love” from The Times explains how this estate planning tool works.

A living trust is a legal entity created to make it easier to transfer assets like real estate property and other assets after death. Assets held within trusts pass directly to beneficiaries according to the terms of the trust. They do not go through probate. Once a trust is created, it must be funded, which places assets within the protection of the trust. These can include bank accounts, investments, real estate, vehicles, jewelry and other personal property of value.

A living trust is managed by a designated trustee. You can be the trustee of your trust while you are living, and your spouse or partner may be a co-trustee. Every trust should also have a successor trustee to serve as your representative. This person will manage the trust and distribute assets after you die.

Living trusts are useful in real estate ownership, regardless of the size or number of properties owned. Any real estate property is subject to probate upon death if it is not placed inside a trust or other arrangements not taken if available under state law (e.g., transfer-on-death deeds). Dealing with real estate after death is challenging for heirs and executors.

Probate can take a long time. During that time, a building needs to be maintained, property taxes must be paid and insurance coverage needs to continue. Making changes to the property or even renting it out during probate may require permission from the court. If an expensive repair needs to be made, like a heating system or a new roof, and the estate is still in probate, someone has to make sure the repairs are done and pay for them.

Certain assets pass directly to beneficiaries. These include life insurance proceeds, Pay on Death (POD) bank accounts and retirement accounts, like IRAs and 401(k)s. Others, like the family home and personal property, could be bound up in probate for months, or years.

A living trust does more than bypass probate. It allows you to declare how you want your assets to be distributed and when. If you don’t want your children to receive a lot of money in one lump sum at a young age, it can break out the distribution over decades. A trust can also set life goals, like graduating from college, before funds are released.

A living trust and last will and testament are different legal documents and achieve different ends. The living trust is in effect, even when the grantor (person who creates the trust) is living. The will goes into effect only when the grantor dies.

Only assets subject to probate are controlled by a will, while assets in a trust skip probate. Trusts are private documents, while the will becomes part of the public record once it is filed with the court. Anyone can see the entire document, which may not be what you intended.

Assets without a surviving joint owner pass through probate. If you fail to designate a beneficiary to receive an asset, then it also will be subject to probate.

Just as every person is different, every person’s estate plan is different. Talk with an estate planning attorney to learn what options are available and what is best for your family.

Reference: The Times (Oct. 29, 2021) “An important part of protecting your assets and those you love”

Sometimes, Estate Tax Planning Can be a Challenge, Even for a Judge

Five and a half years into the case, the question of whether six life insurance policies at their cash surrender value should be included in the deceased woman’s taxable estate is one question, and the second is whether the estate is liable for the tax underpayment penalties. The policies were purchased for $30 million, reports Bloomberg Tax in the article “$30 Million Estate Tax Going To Be ‘Hard,’ Judge Says.”

The final ruling may also have an impact on the overall attractiveness of using this type of arrangement in estate planning. Known as a ‘split-dollar’ arrangement, this is an agreement between parties to split the cost and benefits of a life insurance policy, where a party paying premiums gets an interest in the payout.

The estate in this case is connected to a set of family businesses, described as the “Interstate Group,” accumulated over the decades after Arthur Morrissette began a moving company in 1943. Arthur’s surviving spouse Clara used her revocable trust to transfer $29.9 million to three trusts for the benefit of each of her three sons. That happened in 2006. The trusts then used the funds to make lump-sum payments for six permanent life insurance policies. Each son’s trust held a policy that insured the lives of the two other brothers.

The transactions were governed by split-dollar arrangements between Clara’s revocable trust and her son’s trusts. When an insured son died or an arrangement was terminated, Clara’s trust received either a policy’s cash surrender value or all of the premium payments on it, whichever was greater. If the policy remained in place until an insured son died, Clara’s payout would be taken out of the death benefit, and the son’s trusts would receive any remaining death benefit.

The first issue at trial was the motivation for setting up this type of split-dollar arrangement in the first place. In order to exclude the cash-surrender value of the life insurance policies from the taxable estate, tax rules require demonstration of a bona fide sale or business transactions. In other words, there needs to have been a significant non-tax reason for the arrangement to be put into place.

Attorneys representing the IRS said that the primary reason for the arrangements was to lower estate taxes, where having to wait to be repaid until the sons passed, lowered the present value of the rights Clara’s trust received in exchange for the $30 million.

One of the sons said that the family entered into the arrangement, so that money from a policy’s death benefit would help the surviving son buy each other’s shares at the time of their deaths, while also repaying their mother. He said that the policies paid a better return than the family was getting by putting the $40 million in investment accounts.

If the Morrissette’s argument about motivation prevails, the tax code also requires proof that Clara’s trust received something that was worth the $30 million that she put in. Experts debate what was the best real-world exchange with which to compare the split trust arrangements.

At the end of the trial, U.S. Tax Court Senior Judge Joseph Goeke said, “I look forward to your briefs, because for me this is going to be a hard case.”

This is a complex case, and estate planning attorneys will be watching it to learn if the split-dollar arrangement has a future.

Reference: Bloomberg Tax (October 14, 2019) “$30 Million Estate Tax Going To Be ‘Hard,’ Judge Says”