McNees Insights Estate Planning News - September 2018

by McNees Wallace & Nurick LLC

IN THIS ISSUE:  Modifying Irrevocable Trusts 101  |  Estate Planning for Second Marriages  |  To Gift of Not to Gift

Modifying Irrevocable Trusts 101

by Ambria Armstrong

As family and financial circumstances change with time, clients often desire to modify the terms of the trusts they have created. Even if a trust is irrevocable, in Pennsylvania there are several ways modification can still be accomplished.

By Consent
The Pennsylvania Probate, Estates, and Fiduciaries Code permits noncharitable, irrevocable trusts to be modified by the consent of either (1) the settlor and all beneficiaries of the trust, or (2) the trustee and all beneficiaries of the trust. This consent must be a written document with the signatures of all required parties.

Modification by the settlor and the beneficiaries of the trust is preferable since this provision can be used to modify the trust even if a material purpose of the trust is changed by the modification. However, if the settlor is deceased, this is not an option.

The trustee and the beneficiaries of a noncharitable, irrevocable trust may also modify the trust by non-judicial settlement agreement. The limitation on this method is that the proposed modification cannot be inconsistent with a material purpose of the trust and must include terms and conditions that could properly be approved by a court.

With respect to any of these options, all the current and potential beneficiaries must consent to the modification. If there are minor, unborn, or unknown beneficiaries of the trust, they must be virtually represented by a parent or by an adult in the same “class” of beneficiaries. For example, if the class of beneficiaries includes all of a settlor’s grandchildren, the minor, unborn, or unknown grandchildren could be represented by their parent or by an adult grandchild. 

By Court Order
Although it is a more complicated option, court involvement is often necessary if the beneficiaries are not in agreement or if a charitable beneficiary is named in the trust agreement.

If a charitable beneficiary is named, the Office of Attorney General must be notified at least twenty days prior to filing a petition to modify a trust with the court. It is generally advantageous to request and obtain a letter of no objection from the Office of Attorney General prior to filing. The Office of Attorney General may also require an accounting of the trust prior to issuing a letter of no objection.

An effective petition requesting modification of an irrevocable trust should be specific in the reasons why it is either inefficient or ineffective for the trustee to continue administering the trust according to its terms. For example, there may be new circumstances that frustrate the purposes of the trust, or perhaps certain provisions of the trust result in a waste of resources or do not justify the costs of administration.

By Decanting
If an irrevocable trust cannot be modified by consent or by court order, a third option to achieve a client’s goal may be to “decant” the trust. Decanting is a procedure whereby the trustee of a trust distributes the assets of the trust to a new trust that contains the desired modifications. In order to decant a trust, the trust instrument or the law governing the trust must permit it.

For any of these options, strict adherence to the terms of the trust instrument and the law governing the trust is essential. If you have questions concerning the modification of a trust, please contact a member of the McNees Estate Planning Practice Group.

Estate Planning for Second Marriages

by Vance Antonacci

Whether it is due to divorce or the death of a spouse, many clients end up in a second marriage. A second marriage presents a variety of estate planning considerations that should be addressed. With a second marriage, the following issues should be considered:

  • It is important to understand that jointly owned assets will pass to the surviving spouse in the event of death and will not be disposed of pursuant to the terms of your Last Will and Testament. Therefore, if you want property to pass to a child in the event of your death, the property should not be jointly titled with your spouse.
  • A surviving spouse has a “right of elective share” unless the right is waived in a prenuptial agreement. This is, essentially, a right to one-third of the deceased spouse’s estate. The exercise of the right can disrupt an estate plan if you want to leave property to your children even if your spouse survives you.
  • If there are minor children from the first marriage, consideration should be given to the appointment of a guardian for the minor children if one is needed.
  • If you are living in a retirement community or planning on entering into a community, you may want to address the obligations to each other if skilled care is required.
  • There should be an understanding of any remaining liabilities of the prospective spouse to the former spouse. For example, is there an ongoing alimony obligation or installment payments related to the division of marital property that must be accounted for if the spouse dies?
  • If there is a business, will the new spouse be expected to personally guaranty business debts? If there is an unexpected death of the business-owner spouse, what is the plan for the orderly transition of the business so value is not lost?

The first issue that normally arises is whether the prospective husband and prospective wife should enter into a prenuptial agreement. A prenuptial agreement can confirm how the parties will address the division of marital property, the payment of alimony, and other issues in the event of a divorce. The prenuptial agreement also addresses how the husband and wife may dispose of their property in the event of death. A prenuptial agreement may be necessary to ensure how a spouse’s property is disposed of in the event of death. Some couples (often older couples whose first spouse has died) will limit the prenuptial agreement to death only and not address the possibility of a divorce. A prenuptial agreement can be limited to particular assets as well, such as a family business or vacation home.

Asset titling is important in the context of estate planning. Prenuptial agreements generally only address the division of jointly owned property if there is a divorce. If there is a death, jointly owned property will pass by survivorship to the surviving spouse (unless titled as tenants in common, which is often not done). Therefore, as spouses accumulate assets during the marriage the titling of those assets may be at odds with the intended distribution of them in the event of death.

Depending on the exact circumstances of the couple, an estate plan for a second marriage may involve the following:

  • A trust is funded for the surviving spouse’s benefit for his or her life with the trust remainder to the children of the spouse who funded the trust. If a trust is funded, careful consideration should be given to who will serve as trustee. An independent trustee may make sense to avoid conflicts between the families.
  • Upon the death of the first spouse, all jointly titled property goes to the surviving spouse and the rest of the estate goes to the deceased spouse’s children.
  • Life insurance insuring the deceased spouse’s life is paid to the surviving spouse and the entire estate goes to the deceased spouse’s children.
  • If there is any second-to-die life insurance, the parties must address how the policy will be funded if one spouse dies. This type of life insurance generally is purchased to address death taxes, which only are triggered in most estate plans when the second spouse dies. However, the death taxes often only affect one of the two families. Therefore, there may be little incentive for the surviving spouse to continue to fund the life insurance policy, particularly if he or she has limited resources.

Every client’s situation is unique. The key is to give your situation adequate attention. In the case of a second marriage, this may involve a prenuptial agreement. At the very least, your estate plan should be reviewed and updated.

To Gift of Not to Gift

by J. Corey Reeder

Recently, more and more clients are asking whether they should make large gifts during their lifetime either to provide a beneficiary with the use and enjoyment of an asset during the donor’s lifetime and the beneficiary’s lifetime or to take advantage of the increase in the lifetime gift tax exemption amounts provided for in The Tax Cut and Jobs Act, which became effective on January 1, 2018, and provides a lifetime gift tax exemption of $11.18 million for individuals and $22.36 million for married couple. The answer, of course, is that it depends. Each person’s situation is unique, and no one course of advice or action regarding gifting is appropriate for all. This article addresses a few of the questions clients should ask themselves and/or their advisors in determining whether to make a large lifetime gift.

  1. Do You Want to Give Up Control of the Asset? When a gift is made by a donor and accepted by a donee, the donor loses ownership of and control over that asset. Increasingly, clients are asking about making a gift of their primary residence to their children with the intent of continuing to live in the house as a tenant. While these types of arrangements work for the benefit of both parties in many cases, clients are wise to consider the possibility of a less than favorable outcome before making such a gift. For example, let’s suppose that Dad decides that he wants to gift his home to his daughter and she agrees at the time the gift is made to allow him to continue to live in the home. Absent a written lease agreement between the parties which clearly defines the terms of the arrangement, at any time during the tenancy, the daughter could sell the home, mortgage the home or take another action that would impact the living arrangements of Dad and possibly force him to find (and pay for) alternate housing. Additionally, as people are living longer than ever before, when deciding whether or not to make a large lifetime gift consideration must be given to whether it makes more sense to retain those assets for eventual use for long-term care and extended living situations.
  2. Is the Gift Consistent with Your Overall Estate Plan? When drafting an estate plan for a client, discussion of a gifting strategy is part of the overall planning process. Making gifts outside of this planning simply because of the increased gift tax exemption can often disrupt the overall estate plan and/or result in additional legal costs to redraft an estate plan. For instance, let’s say that Mom has $4 million of assets in the form of real estate, investments and cash in checking and savings accounts. Mom’s Last Will and Testament provides that her estate will be divided equally between her 4 children. Mom later decides that she feels it would be easier for her from a management standpoint if her eldest son was named on her checking and savings accounts and listed on the deed to the real estate. If not done properly, Mom inadvertently could be making a gift of ½ of her assets to her eldest son during her lifetime, leaving only ½ of the assets to be split amongst the 4 children at the time of her death.
  3. How Will the Gift Impact the Donee’s Basis and/or Capital Gains Tax Liability? When a person acquires an asset, that asset has a cost or “basis.” If that person subsequently makes a gift of that asset during his/her lifetime, the basis that the donor had in the asset carries through or, in other words, gets transferred to the donee. In contrast, if the owner of the asset dies and the asset passes to a beneficiary under a will, the basis of the asset passing to the beneficiary is the value of the asset at the time of the owner’s death, and this “stepped-up” basis becomes the new basis for the beneficiary. For example, assume Dad acquires 100 shares of stock in XYZ Corp. at $10 per share. If Dad were to gift these shares to his son during Dad’s lifetime, the son’s basis would be $10 per share. If the son was to then sell the stock for $30 per share, the son would have to pay capital gains tax on $20 per share. However, if Dad were to provide in his Last Will and Testament that the shares of stock pass to his son upon his death and at his death, the stock is worth $20 per share, the son’s basis in the shares would be “stepped-up” to the $20 per share amount. If the son then sold the stock at $30 per share, he would pay capital gains tax only on $10 per share. Consequently, consideration should be given to the economic benefits to the donee of the “stepped-up” basis versus the possible savings of estate or inheritance taxes.

The above represent just a few of the considerations that need to be taken into account when deciding whether or not to make a large lifetime gift. As stated above, each situation is different and no “one size fits all,” so if you are considering making a large gift during your lifetime, please contact a member of the McNees Estate Planning Group.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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