CROSSING THE “T’S” IN ESTATE PLANNING

By Blake W. Kirkpatrick

Last month’s article discussed dotting the “I’s” in estate planning. Specifically, the article addresased the importance of remembering to address your insurance and IRA assets as part of the estate planning process. The cliché of dotting the I or crossing the T really means taking the extra step to make sure every item is addressed. Now we will look at other items that are typically left undone in the estate planning process. As you can imagine, they in large part relate to the letter T….as in Trusts.

Funding the Revocable Trust
It is not uncommon in Florida, and specifically, Naples for people to utilize the benefits of Revocable Trust planning. Numerous articles have been written on the subject of avoiding probate or guardianship through the use of a Revocable Trust. Unfortunately, signing a Revocable Trust in your attorney’s office does not complete the process. One must take careful steps to make sure that assets that do not otherwise pass at death by beneficiary designation or by operation of law are reregistered or retitled in the name of the Revocable Trust.

The example I typically use in discussing funding issues with clients is with real estate. If a deed to a vacant lot says “John Smith and Larry Doe, as joint tenants with right of survivorship,” you do not need to look any further than the deed itself to know that if John Smith is deceased and Larry is alive, Larry now owns the vacant lot. However, if a deed to the vacant lot simply says “John Smith, Grantee,” and John Smith is now deceased, no one really knows (by looking at the deed) who now owns the property. Regardless of whether John has a valid Last Will and Testament the property will not pass to his heirs (designated in the Will or under laws of intestacy) unless a probate estate is opened.

Contrast this however, if John had executed a Revocable Trust and actually took the step of transferring the vacant lot into the name of this Revocable Trust by way of deed. Upon his death, the Revocable Trust still owns the property and the property will pass to his heirs named thereunder through a deed from the successor Trustee. The appointment of a successor trustee under the terms of a Revocable Trust is done pursuant to the terms of the Trust Agreement and generally does not require probate.

The same theme applies to bank accounts, investment accounts, timeshares, certain tangible personal property, stock held in certificate form, promissory notes, partnership or closely held business interests, etc. Every asset you own that does not clearly state “who gets it” at your death is probably an asset that needs to be funded into your Revocable Trust, assuming you have one.

Irrevocable Trust Administration
For others that may have done more advanced estate planning involving the use of irrevocable trusts, sometimes the items left undone is the ongoing administration of the Trust itself. This article will discuss just a few of the more common items left undone.

Generally speaking, irrevocable trusts have annual reporting requirements. Annual income tax returns are not the only item. It is also required, at least under Florida law, that accountings be prepared and given to the beneficiaries on an annual basis. Furthermore, there may be other duties and responsibilities of the Trustee that are often ignored. Simply sticking funds or assets in the Trust and sitting back is a recipe for disaster. In other words, in this context “set it and forget it,” doesn’t work. By way of example, unfortunately, the “set it and forget it” mentality happens more often than not in three common types of irrevocable trusts; grantor retained annuity trusts (GRAT), qualified personal residence trusts (QPRT) and irrevocable life insurance trusts (ILIT).

After all, they are called annuity payments
Grantor retained annuity trusts are trusts whereby the grantor transfers assets to the Trust for a term of years and receives annuity payments back during the term. However, believe it or not, sometimes the trustee forgets to make the annuity payments when they come due (and the grantor forgets to remind them). Such trusts have very strict rules regarding the annuity payments and, therefore, it becomes critical that the distribution timeframes are met.

But I still live here
Qualified personal residence trusts generally involve transferring a residence into a trust for a term of years with the grantor retain the right to use the residence. Assuming the grantor survives the term of years, the QPRT is supposed to terminate and the residence is either transferred to a continuing trust or to the named individual beneficiaries. Far too often QPRTs reach the end of the term and everyone forgets that there is an administration step to take at that time (i.e., distribution of the property).

Feeling Crummey
The last example for purposes of this section of the article is the irrevocable life insurance trust or ILIT. Generally speaking, ILITs are trusts that involve the transfer of, or purchase of, a life insurance policy that will be held in the name of the Trust. Gifts are made on an annual basis to the ILIT by the grantor of the trust (who is typically also the insured). Ultimately, the funds are used to pay the annual premiums on the insurance policy. Each time a transfer of cash is made to the ILIT it would be treated as a gift of a future interest (i.e., when the grantor dies, the policy proceeds are then distributed) and, therefore, the gift does not qualify for the annual exclusion from gift tax. Under a creative strategy whereby a temporary withdrawal right can be granted to the beneficiaries of the trust, the gift by the grantor of cash becomes a gift of a present interest and thus qualifies for the annual exclusion from gift tax. The famous case where the strategy was utilized was Crummey v. Comm’r, 397 F2d 82, (9th Cir. 1968). The withdrawal right letters are typically referred to as “Crummey letters.” Unfortunately, however, this important administrative step is often ignored and is yet another example of a T that does not get crossed.

Conclusion
Many of the above referenced trusts can be very beneficial as part of the estate planning process. Yes, it requires extra steps be taken to fully realize the benefits associated with these trusts; however, it really is not as daunting of a task as it might seem. Utilizing the guidance of professional advisors through the process (rather than cutting corners trying to do it on your own), will help you stay on task and avoid missing a T or I in the future.

This Article does not constitute legal advice and may not be relied upon as such.  Each individual’s facts and circumstances are different. If you have any questions regarding your particular situation, please consult with legal counsel.

Blake W. Kirkpatrick is a Florida Bar Board Certified Wills, Trust & Estates attorney with the law firm of Salvatori, Wood, Buckel, Carmichael and Lottes.  Blake’s practice is concentrated in the areas of estate and tax planning, charitable planning, business succession planning, and estate and trust administration.

Salvatori, Wood, Buckel, Carmichael & Lottes
239.552.4100 | www.swbcl.com