The Wall Street Journal ran an interesting article this weekend examining the extent to which gift givers can exert control over their heirs once they are dead and gone. The article reveals several things that might surprise you given the scope of control that can be included in the language of trusts and wills.
The Journal explained that the issue is of special importance given the unusually favorable estate and gift tax rules that are set to expire soon. Currently, the exemption is $5.12 million per person – twice that ($10.24 million) for a couple. The top tax rate applied to amounts beyond that number comes in at 35%. But not for long, the article warns: the current exemption is scheduled to drop to $1 million and the top tax rate will jump to 55% come January 1, 2013. Given the state of affairs, expert recommend acting now, especially when it comes to giving gifts, as such moves made now can be grandfathered in if the law becomes less favorable in the future.
One important thing to remember if you’re trying to avoid taxation is that you cannot exert any control over the assets you’ve handed over. The IRS has already made clear they will deny tax benefits to a trust if the person who creates the trust retains control, even if that control is indirect.
Many people have heard how Leona Helmsley, the widow of a billionaire real-estate mogul, left a million dollar trust to care for her dog. This wasn’t Ms. Helmsley’s only quirky estate planning move, she also required her grandchildren to visit their father’s grave once a year if they wanted to continue receiving payouts. A wealthy family in Connecticut successfully inserted a provision requiring that heirs spell the family name a certain way if they ever wanted to see a dime of the money. Though these represent some especially bizarre examples of restrictions, it’s important to note there are limits.
One limit includes provisions that are contrary to public policy. This includes requirements that promote divorce or demand criminal conduct and has been expanded to include racial discrimination. Provisions that discourage marriage have also historically be deemed unacceptable as well as any that are ambiguous, illegal or essentially impossible to implement. Religious restrictions are usually OK, like those leaving money to pay for a religious education, though they can, at times, be viewed with more suspicion.
When setting up a trust or a will, there are some important things to consider. First, the devil is in the details. Make sure you clearly spell out who is to be included. For instance, consider carefully what you mean when you say “spouse” and come to a decision about whether that can include same-sex partners. Descendants can also be a tricky issue: adopted kids, stepchildren, children from a surrogate and even those conceived from frozen sperm can all be considered “descendants” under certain circumstances. Though the examples may sound wild to you, they certainly aren’t unheard of. You have no way of knowing what shape your family will take in years to come and it’s best to cover all your bases.
One tool for watching over future generations that the Journal discusses is what is known as an “incentive provision.” Such provisions are meant to promote your descendants’ productivity by doing things like matching their income (to encourage working and not laying around) or providing money to get a new business off the ground. Gift givers have to think about the goals they have for their families and if certain gift strategies would help achieve their ends. Giving money to stay-at-home moms may help strengthen a family, but it’s important to realize how hard it is to think through every eventuality.
Another way of maintaining control once you’re gone is to set up an “heirloom asset” trust. These are designed to protect important family assets, such as a house that has been in the family for generations. Experts recommend that the trust be given enough money so that heirs don’t have to fight over who pays for maintaining the old homestead.
Not every kind of activity can be effectively governed from beyond the grave. For example, experts caution against inserting a requirement to test heirs for drugs, because it can be hard to find a trustee willing to undertake this kind of intrusive supervision.
Whether you have a few assets or a multi-million dollar estate, you need to have an effective estate plan. As a board certified estate planning, trusts, and probate lawyer, I have the skills and knowledge to handle complex estate planning matters (certified as a specialist by the California State Bar Board of Legal Specialization). To schedule a consultation to discuss your estate planning goals and needs, please contact us.
Source: “How to Control Your Heirs From the Grave,” by Laura Saunders, published at WSJ.com.
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