Why is My Trust So Thick?
Written by Christopher J. Berry, Esq. on July 29, 2008 – 6:33 pm -
Clients generally take a look at their completed estate planning documents and are a bit intimidated.
Despite a trend for attorneys to use more “client friendly” language over the last ten years or so, estate planning documents can seem truly daunting to some clients. Other clients are able to understand the documents, but do not understand the reason why it takes so much paper just to leave their property to their heirs. There are three primary reasons:
1. The need to communicate to attorneys, probate courts, the Internal Revenue Service and non-probate courts in a language they are familiar with.
2. Requirements to satisfy the Internal Revenue Code’s estate and gift tax benefits that significantly reduce the estate taxes imposed on the surviving spouse or other heirs.
3. The need to plan for unintended, yet possible circumstances that may occur in the future to the clients or heirs.
1. The Need to Communicate
The law is unlike almost any other area of human endeavor in that the complex relationships of parties need to be stated in a manner that the persons who make decisions regarding a decedent’s estate (i.e. Internal Revenue Service Auditors, Judges, Guardians, Attorneys-in-Fact, Government Administrators, etc.) are familiar with. This can be a daunting task, and changes in language, format and meaning change slowly in the law so that practitioners and their clients have a well understood set of rules to plan under. Compare mathematics as an example. One simply states that two plus two equals four. In an estate planning document, without a history of language and formalities upon which to base the explanation of a client’s plan, the document would have to explain what “one” means, what “plus” means and what “equals” means. That is not necessary in mathematics, because everyone is familiar with those terms. Unfortunately, the practice of estate planning law does not allow for the brevity of expression that mathematics does.
2. Taking Advantage of Estate and Gift Tax Benefits in the Internal Revenue Code
(and avoiding the pitfalls)
As one of the primary goals of estate planning is to avoid unnecessary estate, gift and income taxes, much of the language in estate planning documents is Internal Revenue Code driven. When Congress passes a new statute, the Internal Revenue Service releases regulations explaining its interpretation of what the Internal Revenue Code means. Much of the language in estate planning documents is taken directly from those regulations so as to ensure to the maximum extent that the benefits sought are qualified for. As an example, you look at the principal distributions of the Family and Survivor’s Trusts and in the distributions to heirs after the death of the trustors, you will see the phrase “health, education, maintenance or support” used frequently. It is quoted from Treasury Regulations section 20.2041-1(c)(2) which defines powers that a beneficiary (surviving spouse or children whose inheritances are held in trust for them) can have but which will not cause the property in the trust to be included in the beneficiary’s estate. Those four words are explained in two pages of regulations. However, by using just those four words, it is unnecessary to include the two pages of regulations. There are many, many such terms in your documents that are there to ensure that your estates pay the least tax under your particular testamentary design.
3. Planning for Unintended Circumstances
In order to protect you and your heirs, your estate planning documents must anticipate and provide for circumstances that may never occur, but you will be protected if they do. One example, that adds volume to your living trust is the need to plan for government benefits. Assume the trustors have died and property is being held in trust for a child until the child reaches age 35. The child is healthy and planning for Medicaid or other government benefits is not a consideration at the time the plan is prepared. However, at age 30 the child is seriously injured in a fall and has large medical bills. If the living trust did not anticipate the potential for this catastrophe, the child’s inheritance would go to medical expenses. However, the living trust has special language in Article Twelve, that goes on for three pages, which will automatically convert the child’s benefits into a format that will not disqualify the child from Medicaid, but will enable the trustee to make the child’s life as comfortable as possible, rather than spending the entire inheritance on medical costs.
In summary, there are very real and important matters that require your document to be more voluminous that you might think necessary to carry out your estate plan. However, each word is there for a purpose that I want to protect for you or protect you from. I understand that there are attorneys who prepare much smaller documents, but my concern for you and your family does not allow me to forsake your needs in the interest of brevity.
Posted in Estate Planning, Living Trusts |
August 16th, 2008 at 9:29 am
Your blog is interesting!
Keep up the good work!