What is Shedding Light ?

Shedding Light is the Virginia Wills, Trusts & Estates weblog. I will post here regularly, focusing on those areas of the law that I address every day in my law practice, namely estate planning, probate and the settling of estates, the federal estate and gift tax rules, and adoptions. My goal is to shed light into murky areas. I’ll also post your comments as they are received. I have been advised to confine my snarky political posts, Red Sox rants, cultural observations, cute pictures of my kids, and my Walter Mitty daydreams to my Facebook page. If you must see them, friend me.

Tom Nolan

Ten Years

January 1, 2014 will mark ten years since I took the bold step (for me) of starting my own law firm.  To paraphrase Daniel Webster, it is a small law firm, but there are those who love it.  I am grateful to many many people who have helped me not only stay in business, but prosper.

Clients – the men, women and families in Central Virginia who have entrusted sensitive matters to our care. Without your confidence in me and my staff, my law firm would not have lasted even one year.  Serving you – and serving you well – is foremost in our minds every day.

Co-Workers – Carolyn, Bernadette, Liz, and especially Nancy, who has been with me from the very first day.  I appreciate each one of you and your commitment to excellence.  The esteem with which we are held by our clients and by other professionals in our community speaks as much to your competence and standards as to my own. And Elizabeth, who designed my letterhead and my website, who places my advertising, and so much more.

Financial Professionals – the investment advisors, accountants, and other financial professionals who recommend me to those in need of our services. It is a risk to recommend an estate planning attorney to a trusted friend or client.  I appreciate the implicit compliment that comes with any such recommendation. I never take it for granted. So thanks Michael, David, Yvonne, Mike, Jerry, Wade, Kimberlee, Chris, Jeff, and many others.

Other Attorneys – C.S. Lewis once wrote that “if in your working hours you make the work your end, you will presently find yourself all unawares inside the only circle in your profession that really matters. You will be one of the sound craftsmen, and other sound craftsmen will know it.” I’ve longed to be such a craftsman. There are several attorneys who have befriended and encouraged me, shared their forms and their practice tips, helping a sole practitioner like me to become a sound craftsmen. Thanks to Mark, Jim, Barbara, Jay, John, Wendall, David, Frank, and Derek.

Thank you Jane for your faith in me … and a million other things. And God in Heaven, may I always be your servant first. Except the Lord keep the city, your estate planning attorney waketh but in vain.

Bush Tax Cuts Live On

The Dustbin of History?  When President Obama was re-elected on November 6, 2012 I assumed the Bush Tax Cuts would soon land in the dustbin of history. The President and the Democratic Party blame the Bush Tax Cuts for  many of the things that have gone wrong in the American economy since 2008. All that was required to end the Bush Tax Cuts and reinstate the Clinton era tax increases was to hold fast until January 1, 2013 and it would happen automatically. But a funny thing happened as Americans prepared to skid off the fiscal cliff – most of the Bush Tax Cuts were made permanent.

Does anyone down there know how to cut a deal? If the Wall Street Journal can be believed, Kentucky Senator Mitch McConnell and Vice President Joe Biden were the authors of the legislation. McConnell reportedly called the Vice President on December 30, after talks with Democratic Leader Harry Reid had broken down. From that point forward, Biden and McConnell cobbled out the deal that ultimately became law. On New Year’s Day, the Senate approved the deal 89 to 8 and the House followed up with its own vote of 257 to 167 in favor. Two days later President Obama, from Hawaii, by “autopen” signed into law the bill that averted the automatic imposition of the Clinton era tax rate increases.

Here is a sample of what was enacted.

A permanent per-person estate tax exemption of $5.25 million, adjusted periodically for inflation. That means a married couple can pass more than $10.5 million to the next generation free of estate tax. Unless a future President and a future Congress can agree on a change, I could practice law for 20 more years, with a reasonably wealthy clientele, and never see another decedent’s estate pay estate tax.

A permanent per-person gift tax exemption of $5.25 million, adjusted periodically for inflation. The estate tax exemption and gift tax exemption are now “unified.” You can use your entire $5.25 million exemption either during your life or at your death.

Portability is now permanent.  First introduced in 2011, it is a technique available to married couples to reduce estate taxes. It allows the surviving spouse to add the unused estate tax exemption of a deceased spouse to the surviving spouse’s exemption. This is accomplished by filing a federal estate tax return on IRS Form 706 for the estate of the deceased spouse and making the election provided on that return. This means the end of the use of by-pass trust planning for most married couples of modest weath. 

Marginal income tax rates for those above the $450,000 (married) or $400,000 (single) threshold will shoot up to the Clinton era 39.6% rate. For everyone else, the Bush rates apply.

Capital gains and dividends will be taxed at 20 percent for those with income above the $450,000/$400,000 threshold. The Bush tax rates will remain at 15 percent for everyone else.

Permanent?  I’m reminded of Inigo Montoya. “You keep using that word. I do not think it means what you think it means.”  While the new legislation brings a measure of certainty to estate planning that has not existed for several years, it is permanent only in the sense it will not automatically expire. There is nothing to prevent a future Congress and a future President from changes in the federal tax laws. In fact, few things are more certain.

Federal Estate Tax Awakens From Lengthy Coma

Mr. Federal Estate Tax, who had slipped into a coma on New Years’ Day 2010, came out of his year-long stupor on December 17, 2010, much to the surprise of his friends and adversaries. “The reports of my death have been greatly exaggerated,” he declared in a prepared statement released shortly after his awakening. His medical team cautioned that he would remain in a weakened state for a considerable period of time.

His many admirers hailed his recovery and predicted he would regain his old vigor by the end of 2012. His many detractors expressed confidence that he would never again have the strength to strike terror into the hearts of American taxpayers.

His twin brother Mr. Income Tax, and his much younger sibling Mr. Gift Tax, left their brother’s bedside without issuing any statements. They seemed relieved that their year long vigil had ended. Members of the Tax Family have long been viewed as immortal. Many speculated that if Federal Estate Tax could die, the lives of other family members could also be at risk.

So much for my attempt at Explanation-through-Anthropomorphism. Here’s a more straightforward description of the estate tax and gift tax legislation that passed in mid-December.

Background. Prior to Election Day, Democrats who wanted to raise income tax rates and reinstate the estate tax seemed to hold a winning hand. If Congress did nothing, the Bush Tax Cuts would expire on the last day of 2010, and the tax laws that were in effect on January 1, 2001 would be reinstated automatically. In particular, the federal estate tax, which had been repealed for calendar year 2010, would be back with a maximum rate of 55% and a per person exemption of only $1 million.

But elections matter. The Republicans captured the House of Representatives on Election Day, and within 24 hours, President Obama’s key domestic advisor signaled his willingness to accept a temporary across-the-board extension of the Bush Tax Cuts. On December 17, the President did just that, signing into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Paul Gigot, editor of the Wall Street Journal, was one of many conservatives to engage in a moment of triumphalism, crowing how he loved the symbolism of two Democratic presidents endorsing the heretofore hated Bush Tax Cuts.

Key Changes in Estate Tax and Gift Tax Laws. The Temporary Estate Tax Relief provisions found in Title III are of the most interest to me, as an estate planning and estate administration attorney. Here are the most significant changes in the estate and gift tax laws.

1. Federal Estate Tax Reinstated. The federal estate tax has been reinstated. The reinstatement is retroactive to January 1, 2010.

2. Per Person Exemption Increased. The per person exemption from the estate tax is raised to $5.0 million. It was $3.5 million per person in 2009. It was 1.0 million in 2001.

3. Estate Tax Rates. The maximum tax rate on an estate in excess of the exemption is 35%. In 2009, the maximum estate tax rate was 45%. It was 55% in 2001.

4. Stepped Up Basis Rules Reinstated. Carryover basis is repealed for 2010. Click here for an explanation of these rules. Instead, the assets in the estates of decedents who died in 2010 are entitled to a stepped-up tax basis under the rules in effect since the early 1980′s.

5. Executor Can Elect Estate Tax Repeal for Those Dying in 2010. For the estate of decedents who died in 2010, an executor may elect out of the estate tax and instead be governed by the rules that had been in effect throughout 2010, prior to December 17, 2010. In those cases, there will be no estate tax. However, those estates will not be entitled to a stepped-up tax basis for appreciated assets, but instead will be governed by the rules of carryover basis. So, the estates of wealthy men and women who died in 2010 will forever escape estate tax.

6. Changes in Gift Tax Begin in 2011. The gift tax rules for 2010 are not changed. The gift tax exemption remains at $1 million and the gift tax rates on gifts not shielded by the exemption remains at 35%. However, the gift tax rules change dramatically in 2011. The gift tax exemption will increased to $5 million per person. Thus for the first time since 2004, the estate tax exemption and the gift tax exemption will be “unified.” Beginning in 2011, a person can use up all or any portion of his $5 million exemption during his lifetime or at his death.

7. Portability. The new law allows for the “portability” of the unified credit between spouses. Starting in 2011, a widow or widower can add the unused estate tax exemption of his or her deceased spouse to his or her own exemption. I plan to write more on portability in a future post, but my initial thought is that most married couples will still want to create by-pass trusts in their estate plans to preserve the exemption of the first spouse to die. The portability option should only be used as a backstop for spouses who did not do proper planning.

8. These New Rules Are Temporary. One final but important point: all these provisions will expire on December 31, 2012 unless the current Congress passes and the President signs legislation to extend these provisions or make them permanent. And if nothing is done, the tax laws that were in effect on January 1, 2001, would be reinstated automatically. While it would be a travesty for the federal government to allow that to happen, virtually everything that has happened with the estate tax laws in the past few years has caught me by surprise.

So strap yourself in. The next two years promise to be another wild ride.

Will Estate Tax Repeal Survive?

Will the repeal of the estate tax be a one-year-only phenomenon? Or will it be extended into 2011? Nobody knows – yet. But there is one thing we do know. Elections Matter.

Less than 48 hours after Americans went to the polls on November 2, David Axelrod indicated that the Obama administration would accept an across-the-board temporary extension of the Bush Tax Cuts, including those for the wealthiest taxpayers.

While Mr. Axelrod made no specific mention of estate tax repeal, there is more to the Bush Tax Cuts than just income tax rate reductions. They also (i) cut the capital gains tax rates, (ii) cut the tax rates on corporate dividends paid out to shareholders and (iii) increased the amount of a decedent’s estate that was exempt from the estate tax, until this year when the estate tax was repealed altogether for decedent’s dying in 2010.

So, if the Obama Administration will not oppose a temporary one or two year extension of the Bush Tax Cuts, might estate tax repeal be included as part of the extension?

I have been of the firm opinion that estate tax repeal would be a one-year-only phenomenon. But now I am not so sure. I never expected the Obama Administration would agree to extend the Bush income tax cuts for high income taxpayers. But if it is willing to give up on that issue unilaterally, it is not unthinkable that estate tax repeal might be part of a temporary extension.

Well, at least it is less unthinkable than it was the day before the elections.

Almost every prediction I have made about what was likely to happen with the federal estate tax has been wrong. Until the very last week of December 2009, I was convinced the Congress and the President would enact some legislative fix to prevent a one-year-only repeal. So I am wary of predicting what will happen to this feature of the Bush Tax Cuts.

But right now, I think extending estate tax repeal into 2011 is “in play.” Stay tuned. We should know by the end of January.

How to Title Your Investment Accounts

If you are married, and you own a home, I am willing to bet that title to your home is in your joint names as “tenants by the entirety.” But if you are married and you have a brokerage account or other investment account, I am almost equally sure that you own that account as “joint tenants with rights of survivorship.”

Is one form of title preferable to another? Absolutely. If you and your spouse are going to own a financial account in your joint names, “tenants by the entirety” is almost always the way to go. It has to do with asset protection.

Imagine you are sued. It’s not that farfetched. You might be sued because you are negligent in driving your car and you cause damage to someone else. You might be sued because you break a contract and cause harm to the other party. You might be sued because you are a professional – such as a doctor, lawyer, or architect – who makes a mistake and causes injury to a patient or client or customer.

Now, imagine you go through a court trial and you are the losing party. The court then enters a monetary judgment against you. If you do not have insurance, or enough insurance, to cover the amount of the judgment, it is likely that your creditor will seek to collect the remainder of the amount owed by going after assets that you own personally.

The first asset the creditor might try to levy upon will be your residence. If the home is owned by “Tom and Jane, as tenants by the entirety,” and the judgment is against Tom only, your home is judgment-proof. Under Virginia law, and the law of most states, an asset held by a married couple as tenants by the entirety is not viewed as being owned one-half by Tom and one-half by Jane. Rather, it is owned by the mystical union of Tom and Jane as a married couple and one member of that union cannot unilaterally cut the asset into two separate pieces.

And if Tom can’t do that unilaterally, neither can one of Tom’s creditors. If Jane is not a party to the lawsuit, the asset is protected from Tom’s creditors.

But suppose your investment account is jointly held by “Tom and Jane, as joint tenants with rights of survivorship.” Those assets are not judgment proof. Tom’s creditors could, through the courts, separate the assets into two equal shares and then take Tom’s one-half to apply towards the monetary judgment against him.

Why don’t financial institutions routinely title the assets of married couples as tenants by the entirety? Historically, it was unclear whether the law allowed married couples to own financial assets as tenants by the entirety, or whether that privilege was limited to real estate. Va. Code § 55-20.2 was enacted to remove any doubt about Virginia law. Other states have similar statutes.

If you never get sued, consider this a theoretical discussion. But you cannot safely change titling the day after you learn you are being sued. That could be considered a fraud on your creditors. So my advice to most married clients is: if you are going to hold financial accounts in your joint names, be sure to include the phrase “tenants by the entirety” after your names. And if your financial institution tells you they do not offer this as a titling option, find a new financial institution.

One Drawback To Estate Tax Repeal

I cannot imagine we will ever see another year like 2010. There is no estate tax, that is, there is no tax on the transfer of wealth at death. For thousands of American families, this has resulted in tax savings that would have been unimaginable only a few years ago.

Some of these families have been highlighted by the popular media. Yankee owner George Steinbrenner, real estate developer Walter Shorenstein, energy magnate Dan Duncan, and Albemarle’s John Kluge, billionaires all, died in this calendar year. By a remarkable stroke of good fortune, the federal tax laws permitted them to pass on their lifetime of accumulated wealth to their families without paying any transfer tax.

Surely there are thousands of other unremarked-upon millionaires who have died or will die in 2010, and who were nimble enough in their estate tax planning to take advantage of this one-year-only estate tax holiday.

The stage was set for all this back in 2001, when President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”). The per-person estate tax exemption was raised in steps from $1.0 million in 2001 to $3.5 million in 2009, culminating in the complete repeal of the federal estate tax for one year only – 2010 – and a return to 2001 levels of taxation on January 1, 2011.

But few (if any) estate and gift tax attorneys ever thought 2010 would arrive without Congress making some legislative fix to prevent a one-year-only repeal. Despite the conventional wisdom that it would never happen, on January 1, 2010, the estate tax was repealed. It called to mind British Prime Minister Lord Melbourne’s remark, that “what all the wise men promised has not happened, and what all the damned fools predicted has come to pass.”

While estate tax repeal is a taxpayer bonanza for some, it contains a dark underside for everyone who inherits assets from a person who died in 2010. I am referring to the change in the laws relating to the “tax basis” of assets passing from a decedent’s estate to the decedent’s beneficiaries. These rules prior to estate tax repeal were explained by Robert J. Kolasa, an Illinois estate planning attorney.

[W]hen a taxpayer sells an asset, there is generally an income tax on the difference between the sales proceeds and ‘cost basis’ (what was paid for the asset). Under the pre-2010 rules,… when a person died the cost basis was generally increased (‘stepped up’) to its value on date of death. When the asset is later sold, only the difference between the sales proceeds and date of death value would generally be taxed.

Assets inherited in 2010 no longer qualify for automatic “step up” to the fair market value on the date of the decedent’s death. Under Section 1022 of the Internal Revenue Code, the beneficiary takes the asset with a basis equal to the lesser of (i) the decedent’s basis or (ii) the fair market value of the asset on the date of the decedent’s death. The basis can then be increased under two possible basis adjustments.

In the first basis adjustment, the decedent’s executor may allocate up to $1.3 million to increase the basis of an asset passing to any beneficiary to its fair market value on the date of the decedent’s death. The second adjustment allows an executor to allocate an additional $3 million in basis to assets passing to a surviving spouse, outright or in trust. Of course these allocation rules are subject to many limitations.

1. The basis increase is limited to the property’s fair market value. If the asset is publicly traded stock, the fair market value is easily determined. But what if the asset is a closely held corporation or investment real estate? Even though there may be no estate tax return to be filed, the executor will still have to hire appraisers and provide the information to the IRS.

2. The basis increase must be applied to assets owned by the decedent at death. Thus, for example, property held in a QTIP trust for the decedent’s benefit will not qualify for the basis adjustment.

3. Certain assets are specifically excluded from basis adjustment, including proceeds from a qualified retirement plan account (e.g., IRA or 401-k plans) and assets acquired by the decedent by gift within three years of the decedent’s death.

There is no doubt these new rules will greatly complicate the administration of a decedent’s estates. I have already had a number of clients inform me of the position certain brokerage houses are taking with respect to reporting the basis of the publicly-traded stock acquired from a decedent who died in 2010 on the monthly brokerage statement. They insist upon listing the lower of (i) the decedent’s basis on the date of death or (ii) the fair market value of the asset on the date of death.

I suspect they will correct the basis upon presentation of an IRS tax form reflecting the executor’s allocation under the rules set forth above. But such a form does not yet exist. Apparently, the IRS never expected estate tax repeal either.

Avoiding Family Conflict – Part 2

In a recent post I discussed some common scenarios that often lead to family conflict in the settlement of a decedent’s estate. Most people who plan their estates pay attention to such things as probate and estate tax avoidance. But the best estate plans are also drafted with family harmony in mind. I’d like to continue that post with a few more examples.

There are no simple estate plans. I love so many passages from C.S. Lewis. Here is perhaps my favorite: “There are no ordinary people. You have never talked to a mere mortal. Nations, cultures, arts, civilizations–these are mortal, and their life is to ours as the life of a gnat. But it is immortals whom we joke with, work with, marry, snub, and exploit–immortal horrors or everlasting splendors.”

Similarly, I have never drafted a “simple” estate plan. Each person has unique circumstances that his or her estate plan must address. A new client often begins a meeting with me by declaring that he (or she) just needs a “simple” estate plan. Here are two interesting examples.

A man came into my office a few years ago and asked me to prepare a simple estate plan for him and his wife. In the first 15 minutes, I learned that (i) he was not an American citizen, (ii) his 16 year old daughter was disabled, and (iii) it was not actually his daughter, although he and his wife (the daughter’s mother) had been married for 19 years.

Another man came to see me recently asking me to prepare a simple estate plan for him and his wife. He was a wealthy man, in a second marriage, with 3 children from his first marriage, and 3 stepchildren from his second marriage. And by the way, one of his children had Down’s Syndrome.

Admittedly, these are extreme examples. But there is no one-size-fits-all estate planning template. Your will and other documents should be carefully crafted to address your specific needs and circumstances. The more tailored your plan, the less room there is for family disagreements.

Are your estate planning documents up-to-date? Changes in the law occur frequently. Will Rogers once said death and taxes may be the only sure things in life, but death doesn’t get worse each time a new Congress is elected. Billionaire Yankee owner George Steinbrenner died in 2010 and his estate escaped estate tax entirely. If he had died 8 months earlier or 5 months later, his family would have had to pay perhaps $500 million dollars in estate taxes. Something tells me Mr. Steinbrenner died with an up-to-date estate plan.

Not only do the laws change, individual circumstances change. The persons you selected as your executors, trustees, and the guardians of your children 10 years ago are almost certainly not the same persons you would choose today.

Be careful not to inadvertently change your estate plan. Sometimes people make what seem like inconsequential adjustments in their financial arrangements that unknowingly have enormous consequences upon their deaths. These adjustments can result in the assets of an estate being distributed differently than was probably intended. They can also lead to family feuds or adverse tax consequences.

For example, suppose you have a will that provides for your estate to be distributed equally to your three children at your death. You have named your daughter Susan as your executor. To make it easy for Susan to access your bank accounts and investment accounts in the event of an emergency, you have added Susan’s name to all of them as a co-owner. Under Virginia law, those bank accounts will belong to Susan at your death. They will not be shared with your two other children, unless Susan decides it was not your intention to make a gift to of those accounts solely to her at your death.

The lesson here is a simple one. Before doing any “self-help” planning — even something as simple as adding a child’s name on a bank account — check with your legal advisor to see how it effects your estate plan.

Your Executor needs help. Make sure he or she gets it. The actions of your executor under your will or even your agent under a power of attorney are subject to a rigid and sometimes unforgiving legal standard. It is easy to inadvertently run afoul of those standards. If you name a child to serve in these capacities, perhaps you should introduce him or her to your legal adviser. Furthermore, make it clear in your legal documents that your executor or trustee or agent under your power of attorney should seek professional help and is entitled to pay for that help from your estate.

Consider telling your family in advance what arrangements you have made. Explaining the disposition of your estate and your selection of an executor to your family in advance gives you the opportunity to address any concerns, answer questions, and clear up misunderstandings. Once you lose capacity or die, it is too late. Many family fights could have been avoided, with an open and frank discussion so that everyone is best prepared to handle a loved one’s loss of health or life. Eliminating surprises helps eliminate family fights.

2010: Strange Tax Year To Get Stranger

“The repeal of the estate tax this year — which the economist Paul Krugman has called the “Throw Momma from the Train” law in his New York Times column — has generated much black humor about unfortunate accidents befalling wealthy parents as Dec. 31 approaches.”

Check this link to see why. I fear the last week in December will be full of surprises.

Avoiding Family Conflict

Our law firm logo includes the words Guiding You to Family Harmony in Estate Planning. Those words summarize much of what I strive to do as an estate planning attorney. Sure, I help people reduce their potential estate tax exposure, and I help them plan around the more unpleasant aspects of Virginia probate. But I am just as focused on those personal dynamics that might lead to family conflict when a person dies. Here are situations the require special attention.

Should You Pick a Child as Executor? You are paying an implicit compliment to the person you select to serve as Executor under your will. That is the person who will administer and settle your estate upon your death. It shows you trust the person named to do the right thing, in the right way.

An Executor has an important job. It is often a thankless job. People usually choose a close family member. Most of the time, that is the best selection. But keep this in mind: while an executorship is a post of honor, it is not an honorary post. Don’t name your oldest child just because he or she is the oldest child. Ask yourself whether he or she has the traits of a good executor or trustee. Is he organized? Is she trustworthy? Will he see a job through to completion? Is she diplomatic and fair-minded? Might he abuse the position to settle old scores and wounds that are sometimes 30 years in the making? Is she sensible … will she know when she is over her head and needs professional help? In short, given all your available choices, is that the best person for the job?

Sometimes, people want to name more than one executor, so that no child will feel left out. The administration of an estate is not a therapeutic exercise that will ameliorate 20 years of bad feelings between siblings. A Co-Executorship can be a good thing, but ask yourself first if you have selected two persons who can work well together. Never put two scorpions in the same bottle.

A Common Estate Planning Mistake in Second Marriages. If you are in a second marriage, it may be difficult to be fair to your spouse and fair to the children of your first marriage. Think of creative ways to be fair to both at your death. Try to avoid setting up a situation where your children are waiting for their stepparent to die before they get their inheritance. I had a 50 year old man come to see me recently about his father’s will. The father left virtually everything in trust for his second wife. A trust like this commonly provides limited amounts of income and principal to the spouse during the surviving spouse’s lifetime. When she dies, then the assets will pass to his children by his first marriage. What’s the problem? In this case, the stepmother was the same age as the father’s children, and was just as likely to outlive those children as vice-versa. The father had, perhaps unknowingly, disinherited his children, although in all likelihood, his grandchildren would receive the inheritance some day.

Should Multiple Children Inherit the Family Residence? Here’s another common situation that often leads to family conflict – leaving real estate equally to all your children. In larger families, it is wise to provide an enforceable mechanism permitting either (i) one child to buy out his or her siblings at a fair price, or (ii) the executor to sell the real estate and divide the net proceeds up among the children. In Virginia, real estate usually “drops like a rock” under a decedent’s will directly into the hands of the beneficiaries of the will. The Executor has no control over the real estate unless the decedent’s will gives the Executor explicit authority to sell the real estate. If the beneficiaries cannot unanimously agree on what to do with the real estate, the law provides no satisfactory remedy. As a last resort, one of the owners of the land may file what is known as a partition suit and ask a court to divide the land or, if that is not practical, sell the land and divide the proceeds. Don’t set up your children in a situation where a partition suit is their only remedy.

Picking a Child as Trustee of Another Child’s Trust. Another common problem comes up when a testator has recognized the need to leave one child’s inheritance in trust, where other children are to receive their inheritances outright and free of trust. This might be done for many reasons, including the following: (i) the child has significant creditor problems, including perhaps the IRS, (ii) the child suffers from a physical or mental disability, or from serious financial impulsiveness, (iii) the child is in a particularly bad marriage, or (iv) the child has never grown into the type of person who can be trusted to handle his or her own inheritance.

Suppose that child resents the arrangement, which is quite possible. Who should the testator name as Trustee of that child’s trust? Should he name a sibling as the Trustee of the less-able sibling’s inheritance? What will that do to the sibling relationship following the testator’s death? What if the testator names a professional trustee, such as a bank or trust company or law firm. Are you putting your child at the mercy of that professional trustee? What if they provide lousy service after you die ? Or raise their fees after you die?

All those problems go away if you give someone you trust – such as the child that you were thinking about naming as Trustee – the unilateral power to fire the professional trustee and appoint a new professional trustee in place of the fired trustee. In my documents, I call this person “the Trust Protector.” You would be surprised how much more responsive a professional trustee will be when the trustee knows it can be fired at any time for no reason. Actually, you wouldn’t be surprised at all.

In my next post, I will share some more thoughts on Avoiding Family Conflict.