The KRASA LAW, Inc. Estate Planning Blog

Wednesday, May 30, 2012

Which Trust Controls?

One of the most important aspects with regard to trust-based estate planning is funding the trust.  A trust only controls assets that are titled in its name.  This is why creating the trust is only half the work.  The other half of the work is to draft documents, deeds, and forms to ensure that all assets are titled into the name of the trust.  After this initial work is completed, it is imperative to make sure that, going forward, all assets acquired after creating the estate plan are titled to the trust.

The most common type of trust funding problem is the failure to transfer some assets into the trust.  Such a failure creates a scenario where some assets are titled to the trust while other assets are still in the trust maker’s individual name.  The assets that are in the trust can be transferred to the beneficiaries without court involvement while the assets that are not titled to the trust will be subject to another procedure, perhaps even probate, depending upon the nature of the asset and the total value of the assets that are outside of the trust.

Another problem occurs when a person creates a second or third trust, perhaps intending to revoke or change a previous plan, but fails to transfer all assets to the new trust.  The result is that some assets are titled to the older - and perhaps out-of-date trusts - while other assets are titled to the new trust.  While it might be argued that the trust maker only intended the most recent trust to control all of his/her assets, legally, each trust remains effective and controls its own assets. 

If the trusts have different trustees or different beneficiaries, some assets will be distributed one way and other assets will be distributed another way.  The situation will cause confusion, delay, expense, and possibly hard feelings or litigation. 

Trust funding can often be confusing and more detailed than one might think.  This is why it is important to have an attorney who handles the funding rather than relies upon the client to be responsible for the funding, which is a crucial aspect of the estate plan.
Another way to guard against this potential problem is to amend the existing trust rather than create an entirely new trust.  If the trust maker wants to change everything in the trust, he/she can simply restate the existing trust, amending it in its entirety, while keeping the same original trust name and same original trust date so that all previous funding is still valid.  This will ensure that 100% of the assets are controlled by the most recent version of the estate plan.

This potential problem illustrates why it is paramount to have a comprehensive and detailed approach to estate planning, even when a given estate appears to be “simple.”

Wednesday, May 9, 2012

An Eternal Presence

My mother died a week after Valentine’s Day of my senior year in college.  I flew home to California from my school in Vermont to spend time with my family and attend her “celebration of life.”  Upon my return, I went to the campus post office to pick up my mail.  When I opened my mailbox, waiting for me was a card from my mother.  For a brief moment I thought that my mother’s death had all been a bad dream.  Then suddenly I realized that she must have sent the card right before she died.  I opened it to discover that it was a belated Valentine’s Day card which read, “Do you know how much I love you?”  The experience was actually very comforting – it was as if my mother were still present.

I was reminded of this episode when I recently thought about my own estate plan for the benefit of my son who is about to turn two years old.  Being an estate planning attorney, I made sure that my wife and I nominated guardians to raise him should something happen to both of us before he becomes an adult.  We tried to identify the core values that we would want his guardians to possess and considered practical issues such as the potential guardians’ locations and whether he’d be able to remain in the same school.  We thought about whether the same persons we nominate as guardians should also be named as trustees to manage his inheritance, or whether it would be better to have a system of checks and balances.  We even named temporary guardians so that in an emergency, he wouldn’t automatically be placed in child protective services while the Court took the time to officially appoint a guardian. 

But I realized that, despite all of this detailed, legally-centric planning, we overlooked one key element: how will we continue to be a presence in his life?  Right now, we are his whole world.  But if something happened to us, would we become a fading memory?  Is there anything we can do about this?  And then I remembered my mother’s last Valentine’s Day card.

What if when I graduated from college, somebody handed me a letter that my mother had written before her death telling me what it means to apply my education to the “real world”?  What if when I received the positive results of the Bar Exam, somebody handed me a letter from my mom about what an incredible accomplishment I achieved?  What if at my wedding, somebody handed me a letter from my mom about love and commitment?  What if when my son was born, somebody handed me a letter from my mom about the instant and unconditional love a parent has for a child?  I thought about how I was lucky enough to have that comforting experience once, by accident.  It would have been wonderful if I could have had that experience over and over again throughout my life.

In addition to making all the important legal and practical plans, I realized that my wife and I – as well as all parents of young children – should spend a weekend sitting down and thinking about what messages we plan to give to our son at certain milestones of his life.  We should memorialize those messages in personal letters.  Hopefully, we’ll be able to actually read those letters to him.  But, should we not be that fortunate, we will ensure that we will have some presence in his life well into the future.

Tuesday, April 24, 2012

What is the Difference Between a Revocable Trust and Irrevocable Trust?

In my last two columns, I spoke about the various methods of modifying both revocable and irrevocable trusts.  This series of articles provoked the obvious question from a few readers: What is the difference between a revocable trust and an irrevocable trust?

Revocable Trust

A revocable trust is the most common and basic type of trust.  When you create the trust, you as the trust maker, reserve the power to change anything about the trust at any time without the need of obtaining permission from anybody.

The beneficiaries of the revocable trust have no legal right to any of the assets of the trust.  You can change the beneficiaries at your whim and thus the beneficiaries merely have an “expectancy” of inheriting something from you but are not guaranteed or promised anything.    

Because you have full control and because you can change anything about the trust at any time, for the most part, the trust is not considered to be a separate entity from you.  All the assets in the trust are still part of your estate and you use your Social Security Number as the Tax Identification Number of the Trust.  Your state and federal income taxes, your property taxes, and your estate taxes remain exactly the same as if you never created the revocable trust in the first place.  The trust serves as merely a “pass through.”

If everything is the same, why create a revocable trust in the first place?  The reason is to create a contingency plan in case you become incapacitated or pass away.  Your trust will name a successor trustee and give that person instructions on how to pay your bills, manage your property, and distribute your assets to your beneficiaries.  This is the essence of estate planning and in the vast majority of situations, the revocable trust is the most efficient way to ensure that your wishes are carried out smoothly and with the least expense possible upon your incapacity or death.

Irrevocable Trust

An irrevocable trust is a trust that cannot be changed easily by the trust maker once it is completed.  As I mentioned in a previous article, you still might be able to change your irrevocable trust, but you need to often obtain permission from the beneficiaries, the Court, or both. 

The beneficiaries have an enforceable right to the trust assets, rather than merely an “expectancy” as with revocable trusts.  The trustee must take special care as to consider not only the current beneficiaries of the trust but also the remainder beneficiaries: sometimes this can be a very tricky balance. 

An irrevocable trust is considered a separate entity from you as an individual.  Often, you will need to obtain a new Tax Identification Number for the trust.  Transfers of assets into the trust will often be considered taxable gifts and such assets will generally be removed from your estate.  The irrevocable trust can be drafted in such a way as to place income tax liability on the trust itself, requiring the trust to file its own tax return, or can be drafted in such a way to keep the tax burden on you as the trust maker.  

Reasons for creating irrevocable trusts include tax and gift planning, planning with life insurance, ensuring that assets in the trust are used to carry out a specific purpose such as caring for a pet or providing a person with a legal defense fund, planning for minor children, and – in some circumstances – providing asset protection to the beneficiaries.

Tuesday, April 10, 2012

Irrevocable Trusts: Not Necessarily Set in Stone

In my last article, I discussed the typical procedures for modifying revocable trusts.  I noted that a trust in California is presumed to be revocable unless it indicates otherwise.  However, there are many reasons why you might decide to create an irrevocable trust such as tax planning, gifting, special needs planning, and asset protection planning.  But what happens if you have a change of heart after establishing an irrevocable trust?  Is it too late to change your mind?

Fortunately, the California legislature recognizes the problem of “dead hand control” and allows several procedures for modifying irrevocable trusts.  A few of the most common procedures are detailed below.

1.  Consent of Settlor and All Beneficiaries.

If the trust maker (also referred to as the “settlor”) and all the beneficiaries of the irrevocable trust agree to a particular modification, they may modify the trust in writing privately, without the need of obtaining court approval.  If not all of the beneficiaries agree to a particular modification, the beneficiaries who wish to modify the trust may petition the court to approve a particular modification, provided that they have the consent of the settlor.  The court has the discretion to approve the particular modification as long as “the interests of the beneficiaries who do not consent are not substantially impaired.”

2.  Consent of All Beneficiaries.

Sometimes the desire to modify an irrevocable trust does not develop until after the settlor has become incapacitated or has passed away.  In these circumstances, it is still possible to modify an irrevocable trust if all the beneficiaries agree.  Without the ability to obtain the consent of the settlor, the beneficiaries must obtain court approval.  The court will typically approve of the proposed modification as long as either no “material purpose” of the trust is affected by the proposed modification or that the reason making the modification outweighs the material purpose of the trust. 

3.  Changed Circumstances.

Sometimes circumstances change.  What makes sense to the settlor when establishing the irrevocable trust might not make sense years later.  A trustee or beneficiary may petition the court to modify or terminate an irrevocable trust if “owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust.” 

As the aforementioned examples articulate, an irrevocable trust is not necessarily set in stone.  Most people – including attorneys – assume that it is impossible to change an irrevocable trust, but there are several procedures worth investigating if there is a desire to make a change to an irrevocable trust.  Once these procedures are understood, opportunities for advanced and creative planning become abundant. 

When attempting to modify an irrevocable trust, it is very important to be mindful of the tax implications of the particular change and to be very careful so as not to create any unintended consequences.  However, it is important to remember that even with an irrevocable trust, you are not necessarily “stuck” with an outdated plan.

Monday, March 26, 2012

Revocable Trusts: Not Set in Stone

As General Patton once famously said, “A good plan today is better than a perfect plan tomorrow.”  In the context of estate planning, most clients understand this adage and create an estate plan even if they are not 100% sure of their wishes.  They know that it is important to avoid procrastination and that they may always change their estate plan in the future should they later develop a better idea of their wishes. 

Living trusts are central to most estate plans.  In California, a trust is presumed to be revocable unless it states otherwise.  However, even if a trust is revocable, it is important to follow the proper procedure for modifying it in order to make the changes effective.

If the trust dictates a specific procedure for making modifications, that procedure controls.  Absent a specific procedure, a trust must be amended by a separate writing clearly stating the changes, signed by the trustmaker, and delivered to the trustee. 

Some individuals think that it would be easier and less expensive to simply cross out provisions of the trust and write in their changes.  Others try to type something themselves, often overlooking the specific procedure or the various nuances of the trust instrument that render the attempted change void.  Once, I even saw a client attempt to make modifications by scotch taping updated typed clauses over the existing trust document – literally a “cut and paste!” 

While these “do-it-yourself” methods of modification might seem easy and straightforward, it is important to spend the time, effort, and fee to have a qualified attorney prepare your modification in order to ensure its efficacy. 

A modification might consist of a simple amendment if there are only one or two details of the trust that the trustmaker wishes to change, such as the addition or subtraction of successor trustees or a change in the amount that a beneficiary receives.  This would be akin to “changing sparkplugs.”  However, if the trustmaker wants to make structural changes to a trust, or if the trustmaker has many details that he or she would like to change, the trustmaker likely would be better served by creating a “restatement,” an amendment that changes the trust in its entirety – in other words, a “full body restoration.” 

Many married couples have an “A/B trust” which means that the trust is wholly revocable while both spouses are living.  However, when the first spouse passes away, part of the trust becomes irrevocable, unless the surviving spouse is given a “power of appointment.”  Occasionally, the surviving spouse mistakenly assumes that he or she is able to make changes to the entire trust after the death of the first spouse.  If the surviving spouse attempts to make such a change without the aid of a qualified attorney, the surviving spouse might never realize that his or her changes were not effective.  The good news is that even irrevocable trusts may be modified under certain circumstances. 

In my next blog, I will discuss the various methods of modifying irrevocable trusts.

Monday, March 12, 2012

Who Will "Parent" Your Children

Most people do not get around to planning their estates until later in life, long after their children have all grown up and moved out of the house.  It is rare to find a young person thinking about estate planning.  The reason is that most young people feel that they have more debt than equity and they do not think that it is likely that they’ll become incapacitated or will die in the near future.  It is easier to put off thinking about such grim things until the time is “necessary.”  However, young people who have minor children of their own need to create an estate plan now that includes extensive guardianship provisions.

Guardians can be nominated by parents to both (1) be responsible for their children’s care, custody, control, and education and (2) be responsible for the management and control of their children’s property in the event that the parents can no longer fill these essential roles due to incapacity or death.  The parents can nominate the same person or persons to fill both roles or can nominate one set of guardians to be responsible for the minor child’s custody and personal needs and a second set of guardians to manage the minor child’s property.

Parents may nominate a guardian in writing.  The writing may be part of a will, a power of attorney, a trust, or may be a separate, independent document.  The writing typically states the circumstances under which a guardian is nominated, such as the death or incapacity of both parents.

When a guardian is needed, the Court will then appoint a guardian and will give strong consideration to the person or persons whom the parents nominated in writing.  The Court will want to ensure that the proposed guardian really will be a beneficial choice for the minor children, but, barring any problems, the court will likely abide by the parents’ choice.

By nominating a guardian in writing ahead of time, the parent’s plan will most likely reduce delay in the procedure for appointing a guardian and avoid a family dispute over who should be appointed as the guardian.

Because the formal legal appointment of a guardian does not happen instantly, there is a strong possibility that in an emergency, law enforcement will place minor children in Child Protective Services until the Court formally appoints the guardians nominated by the parents.  In order to prevent this from happening, it is prudent for parents to sign a second writing, nominating “temporary” guardians until a permanent guardian can be appointed by the Court.  This additional document should include specific instructions that it is the wish of the parents that the children be placed in the custody of the temporary guardians rather than Child Protective Services until such time as the Court can appoint permanent guardians.

The additional “temporary” guardianship nomination can be especially helpful if the permanent guardians do not live locally and law enforcement must find temporary placement immediately.  However, even if the temporary guardians are the same as the permanent guardians, because the guardians do not become permanent until after the Court formally appoints them, the additional “temporary” guardianship appointment is important in all circumstances.

Although most young people do not think they need to worry about estate planning, issues surrounding the custody, care, and upbringing of minor children introduce a whole host of concerns unique to their circumstances that make planning ahead essential, despite not having a significant estate or any immediate known health problems. 

Wednesday, February 29, 2012

Papers, Please

Managing the affairs of a decedent’s estate is never easy.  Not only are you in shock and grief over losing a loved one, but you are forced to navigate complex rules and barriers when attempting to settle the estate.  Gaining access to accounts or even basic information can seem like an insurmountable hurdle.  If the decedent did not have his/her assets titled to a trust, you will likely be asked to present “Letters of Administration” to the financial institutions before you are allowed any control over the accounts. 

“Letters of Administration” (or “Letters Testamentary”) refers to a document that the court issues to an executor (also known as a “personal representative”) of an estate which gives that person court authority to access the decedent’s accounts.  The problem is that in order to obtain the Letters, you must open up a formal probate which is time consuming, public, and expensive.

You want to avoid probate if you can help it.  Contrary to what a financial institution might tell you, you might be able to avoid a probate if the estate falls within certain categories.

First, if the decedent created a trust but left some bank accounts outside of the trust, you might be able to use a procedure known as a “Heggstad Petition” if there was any writing (such as a “Schedule A”) that provides evidence that the decedent intended to transfer the accounts into the trust.  A “Heggstad Petition” is rather simple and inexpensive, especially when compared to a probate.

Second, the estate might fall into a category known as a “small estate.”  If the total value of the decedent’s estate is worth $150,000 or less, then a “small estate affidavit” would generally be available to take control of the decedent’s personal property, including bank and stock accounts.  Rather than going to Court, certain individuals known as “successors to the decedent” can simply wait 40 days, sign a one-page affidavit containing specific provisions, present it to the bank, and legally compel the bank to transfer the decedent’s accounts. 

Third, for surviving spouses of the decedent, sometimes all or part of the decedent’s property automatically passes to the surviving spouse by operation of law.  If the financial institution refuses to accept this fact, the surviving spouse might decide to pursue a “spousal petition,” a simple petition requesting that the Court issue an order that the decedent’s property in fact belongs to the surviving spouse.

Unfortunately, most employees at financial institutions are unfamiliar with these alternatives to probate and are trained to simply tell you that Letters are required in order to proceed.  This “papers, please” approach can create unnecessary problems if you are not aware that there might be methods other than probate to settle the estate.  An attorney who specializes in estate planning can figure out whether a probate alternative is available, thus saving a great deal of time, effort, expense, and frustration.

Tuesday, February 7, 2012

The Superhero of Trusts!

You’ve known for years that you need to “get your affairs in order.”  While you don’t like thinking about it, you know that you are merely mortal and that it would be wise – a gift to your loved ones, in fact – to create an estate plan that allows a trusted person to handle your personal and financial affairs in accordance with your wishes in the event of incapacity or death.  You finally decided to visit your estate planning attorney to address all these lingering issues that you have been mentally and emotionally postponing for far too long.

Your main estate planning document is your revocable living trust.  It clearly dictates who will inherit from you (your “beneficiaries”), how they will inherit, and who will manage your finances in the event of your incapacity and administer the trust upon your death (your “successor trustee”).

You are comfortable with your trust as it clearly expresses your intent in a legally binding manner.  You know, however, that circumstances might change: what seems like a good idea today might turn into a disaster tomorrow.  Your beneficiaries might develop special needs or financial / lawsuit problems, the trusted friend or advisor you named as trustee might turn out to be unreliable or deceitful.  You know that as long as you are alive and have capacity, you can change any part of the trust.  But is there any hope after you become incapacitated or pass away?

The solution may be to name a trust protector in addition to a trustee.  A trust protector is a third party who is independent from the trust.  The trust protector has certain powers to protect your overall intent of the trust.  The concept originated in the context of complex offshore irrevocable trusts that were designed for asset protection, but has evolved to be useful in the context of a many common domestic trusts such as life insurance trusts, gifting trusts, and even revocable living trusts.

Some of the powers of a trust protector might include the ability to hire and fire trustees, the ability to change the governing law of a trust, the power to resolve disputes between co-trustees or disputes between trustees and beneficiaries, the ability to veto investment decisions of the trustee, and the ability to modify the trust to keep up with current law or to provide better protection to a beneficiary.  With these powers, just like a superhero, the trust protector can jump in to protect or save the trust when necessary.

If a trust is irrevocable at the start, designating a trust protector is a way of maintaining flexibility and control over the trust.  If a trust is revocable at the start – such as a revocable living trust – having trust protector provisions can provide flexibility and control when the trust eventually becomes irrevocable upon your incapacity or death.  

Figuring out whom to designate as your trust protector can be challenging.  While the trust protector does not have the day-to-day responsibilities of your trustee, your trust protector generally has more sophisticated powers and duties.  Generally, naming a trusted advisor such as a CPA or an attorney as your trust protector makes sense.  Alternatively, you may decide not to name a trust protector at the outset, but have provisions that provide a procedure for naming a trust protector in the future if one is needed.

Tuesday, January 24, 2012

Should Those "Alabama Boys" Hire Me?

I am a guy who likes adventure.  Good, clean, responsible, wholesome adventure.  My most recent adventure was my participation in the 2012 U.S. Pond Hockey Championships in Minneapolis, Minnesota.  It’s a tournament where the organizers set up 26 hockey rinks on frozen Lake Nokomis for three days of competition and camaraderie in snowy sub-zero conditions.

On the first night of my trip, while I was waiting for the shuttle to take me from the lake back to my hotel, I met a team from Alabama.  They were all originally from Canada and all played minor league hockey for years, one of them even enjoying a brief stint with the NHL’s Calgary Flames.  They were as rowdy and non-PC as you might expect a bunch of former Canadian minor league hockey players to be. 

They invited me to accompany them for the night as they planned to go out and have some fun.  I declined as I suspected that the kind of adventures they had in mind that night were probably not of the “good, clean, responsible, wholesome” variety.  However, once they found out I was a lawyer, they all asked me for my phone number in case they needed legal help at 3:00 in the morning.  I tried to explain to them that (1) as an Estate Planning lawyer, I do not specialize in Criminal Law; and (2) I am not licensed to practice law in Minnesota.  I’m not sure if these fine points ever sunk in.  However, this anecdote reveals an important lesson about finding the right lawyer.

Historically, it was common for the town lawyer to practice in a variety of fields.  The same lawyer could file a lawsuit on your behalf relating to a business transaction, could defend you in a criminal case, and could draft your Will.  However, as society and the legal system have become more complex, the “general practitioner” lawyer is rare and is probably not the best person to handle your legal matter.  “Dabbling” in a practice area can be dangerous and you want to be sure you have a lawyer who has the expertise to help you with your issue. 

I have no hesitation in turning down legal projects if I feel that a particular issue is outside my scope of expertise.  I firmly believe that it is important to be honest about the matters that I am able to handle well and those that would be better handled by a lawyer who specializes in a different area of the law.  What should always be paramount is that a particular client’s matter will be handled well.  

A good method for finding a lawyer who specializes in a particular area of the law is to look for lawyers who are certified by the State Bar of California as “Legal Specialists.”  Each Certified Legal Specialist must practice in the area for a minimum number of years, have a minimum number of educational credits in the particular area, be recommended for certification by numerous peers, and take a 6.5 hour exam.  The State Bar of California certifies “specialists” in 11 practice areas.  For more information, please visit and click on “Legal Specialists.”

Although I am a Certified Legal Specialist by the State Bar of California in Estate Planning, Trust and Probate Law, I would not have a clue about how to handle a criminal matter; likewise, a criminal attorney would likely not be able to draft an effective estate plan.

Saturday, January 14, 2012

Determining Your Fate

One of the most important aspects of Estate Planning is to provide a mechanism to deal with incapacity.  In the event that you are mentally or physically unable to effectively manage your personal or financial affairs, who will fill this important role?  Just as important, how will that trusted person be able to take control of your assets and manage them for your benefit with the least amount of expense and bureaucratic hoops?

Without proper planning, your loved ones will most likely have to petition for a Conservatorship, a court-supervised process that can be time-consuming, costly, and embarrassing.  If you have proper Estate Planning, your Revocable Living Trust gives your trustee the authority to manage your trust assets during your incapacity and your Durable General Power of Attorney gives your “Attorney-in-Fact” the authority to manage assets that are titled in your individual name as well as authority over other personal affairs such as access to mail, the ability to deal with the IRS, the ability to enter into contracts, etc.  (For purposes of this article, “trustee” and “attorney-in-fact” shall both be referred to as “agent.”)

It is important to understand how your Trust and Power or Attorney give your agent the authority to manage your assets in the event of incapacity.  Most clients who are currently of sound mind and health prefer to only allow their agents to have power over their assets in the event that they are incapacitated.  This is often referred to as a “springing power,” a power that only “springs” into effect upon your incapacity: your agent has no power over your assets unless that power is triggered by your subsequent incapacity.

With a springing power, your Trust and Power of Attorney should (1) clearly define “incapacity” and (2) articulate how “incapacity” is determined. 

Regarding the definition, it is important that it be clearly stated so that a title company or a bank officer will easily understand it.  I often use the following definition: “I will be considered incapacitated during any time that I am unable to effectively manage my property or financial affairs because of age, illness, mental disorder, dependence on prescription medication or other substances, or any other cause.”

As far as determining whether the definition has been met, you have a number of options.  The most common option is to require that two licensed physicians sign a statement stating that you have met the threshold of the definition.  The thinking behind having two physicians sign a statement is to provide a check and a balance: taking away your ability to manage your affairs and giving them to someone else is significant and you want to be protected from a whim or fraud.  A further protection would be to require that the two physicians be independent of each other, i.e., not in the same practice. 

The downside to this check and balance is that it will require more effort, time, and complexity to obtain the necessary documentation.  As a result, some Trusts and Power of Attorney documents only require one doctor to make the determination.
Another approach is to create a “disability panel,” where a number of persons – either doctors, laypersons, or some combination thereof – will vote to determine whether or not you have met the definition of “incapacity.”  This is especially helpful if due to personal or religious values you prefer not to have a medical doctor involved in the determination of your mental health.

In addition to your Trust and Power of Attorney having a clear procedure for determining your incapacity, it is also critical to authorize your agent to have access to your medical records by executing a “HIPAA Waiver.”

Tuesday, December 27, 2011

A "Crummey" Idea (Part 2 of 2 - Continued from "The Estate Freeze")

In my last blog, entitled “The Estate Freeze,” I described an Estate Planning technique known as an “Estate Freeze” whereby you make gifts during your lifetime, take the Estate and Gift Tax consequences now, and allow those assets to appreciate in your beneficiaries’ estates rather than in your own estate.  This technique often involves consideration of the federal Gift Tax Exemption and the annual exclusion, allowing you to gift up to $13,000 per person per year.  However, what if you want to take advantage of this technique but still want control over the gifts?  For example, you may have beneficiaries who are minors such as children or grandchildren.  The solution is an irrevocable trust known as a “Crummey Trust.”

In order to maintain control, the idea is to make gifts to an irrevocable trust rather than to the beneficiary directly.  The fact that the trust is irrevocable and has certain features means that the gifts are no longer part of your estate.  The trust outlines circumstances in which the gifts may be used on behalf of the beneficiary and also names a Trustee – a trusted third party – who will follow the trust’s guidelines.  

When attorneys first came up with this concept, they encountered a problem: in order for the annual $13,000 exclusion to apply, such gifts needed to be a “present interest,” meaning that the beneficiary has to be able to use the gift right away.  This contradicts the whole point of setting up the trust in the first place – to prevent the beneficiary from having unfettered access to the gift.

To combat this problem, Estate Planning attorneys developed the concept known as a “Crummey Trust,” named after a famous Court case that upheld this structure.  The trust includes language that states each time a gift is made to it, the beneficiaries have a certain window of time (usually between 30 and 60 days) to demand that the gift be given directly to them (“demand right.”)  After that period of time, the beneficiary no longer has any right to demand the gift and instead it is subject to the restrictions of the trust.  The existence of the demand right satisfies the “present interest” requirement and thus the annual $13,000 exclusion applies to the gift.  However, the beneficiary must know that he or she has this demand right.  As a result, each time a gift is made to the trust, the Trustee must send the beneficiary a letter informing him/her of the demand right.  This is known as a “Crummey Letter.”  

While it is true that during the window of time the demand right is open, the beneficiary could simply demand the entire gift, the beneficiary will learn that if he or she ever exercises that right, you will no longer make any gifts into the trust at all.  The beneficiary will see the “big picture” and allow the demand right to lapse so that you will not be discouraged from making future gifts to the trust.

This can be a powerful gifting tool.  Crummey Trusts are often used with life insurance (also known as an “Irrevocable Life Insurance Trust” or an “ILIT”) but can be applied to a broad range of situations.  One key exception is beneficiaries with Special Needs: because of typical concerns with maintaining public benefits, Crummey provisions cannot be inserted in Special Needs Trusts.

It is paramount that Crummey Trusts are “maintained” in that the Trustee must send Crummey Letters to the beneficiaries each year a gift is made.  For good measure, the beneficiaries should acknowledge receipt of the Crummey Letters.  Failure to issue Crummey Letters could collapse the entire plan.

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