A Holy Grail Inter-Vivos QTIP Client-Memo

Click here for my recent Leimberg Information Services newsletter about the inter-vivos QTIP trust (qualified terminable interest property). One of the best estate and trust planning tools available for a broad range of clients, with also the benefit of powerful asset protection. It is among my favorite trust planning options. The newsletter link also includes information about my upcoming May 24 Leimberg webinar on inter-vivos QTIP trusts.

Irrevocable Trusts are No Longer Carved in Stone

For my continuing legal education (CLE), I attended recently the 2023 University of Miami Heckerling Institute on Estate Planning. It is always a great week of very informative presentations. [I am the ultimate nerd who attends every presentation and who writes notes throughout every presentation. Although I generally do not refer again to the notes, the note-taking process helps burn numerous points into mind.]

One of the key presentation points at Heckerling that continues to resound more loudly each year is the notion of how — in some cases essentially easily — one now can change or rewrite an otherwise existing irrevocable trust by decanting, or distributions in further trust, non-judicial settlement agreements, etc. In my view, the idea of an irrevocable trust substantively no longer has powerful relevance. By contrast, in my first year of law practice many years ago, following my first meeting then in which our client signed an “irrevocable” trust document, I felt as though that document had at that moment become carved in stone.

Bottom line. And consistent with a recommendation from one of the Heckerling speakers, you should consider including a provision in your trust document that helps protect against eliminating beneficiaries as a result of a decanting, non-judicial settlement agreement, etc., such as my own sample language below:

Except as to an exercise of the powers of appointment under Article XX of this trust agreement, no statutory powers in any jurisdiction, including but not limited to decanting or by non-judicial settlement agreement, nor by operation of any other provisions included hereinafter, may be exercised in any manner with the result of removing or eliminating any individual’s beneficial interest under this trust agreement, whether or not such interest is at such time vested or contingent.

You can email me at james@ktlawllc.com or text me at our law firm central phone number (470) 401-0100.

Join me for my somewhat contrarian Leimberg SLAT webinar

Most marketable, mnemonic sales-oriented trust and estate planning efforts (e.g., SLATs [spousal limited access trusts)] are greatly oversold, in my opinion. I am not opposed to the use of SLATs, but believe strongly they are being marketed with over-weighted accolades that fail to reflect crucial tax and non-tax checklist items and other important considerations. As a practitioner, I try my best to review trust and estate sales efforts from the perspective of an informed customer, rather than simply from a seller’s view. My upcoming Leimberg webinar will cover an array of these different SLAT factors and issues that can help you better serve each particular client; and touch on the potential alternative or complimentary use of inter-vivos QTIP trusts. Click here for details about my upcoming webinar.

Most SLATs are Oversold

The popularity of SLATs (spousal limited access trust) is, in my view, a great marketing spin. But, in most cases, SLATs are being oversold.

Oversold for the following three key reasons:

(1) A Secondary Interest for the Settlor Spouse? How can (or will) the settlor spouse who creates and funds the SLAT obtain any interest in the SLAT in the event of the early death of the beneficiary spouse? Other than possibly inclusion of an unpredictable limited power of appointment under the terms of the SLAT, I simply cannot find an effective way to protect the settlor spouse. Also, in my view it is only by using an inter-vivos QTIP trust can the settlor spouse retain a secondary interest in the QTIP trust in the event the beneficiary spouse predeceases the settlor spouse without that retention triggering later estate inclusion for the settlor spouse for estate tax purposes. See Treas. Reg. Section 25.2523(f)-1(d)(1); see, for example, IRS Private Letter Rulings 200406004 and 200413011.

In addition, even if one can find tax-law support to avoid estate tax inclusion for the settlor spouse’s secondary interest in, e.g., a SLAT or inter-vivos QTIP trust, that tax planning becomes painfully illusory and ineffective if local state law treats the settlor spouse’s secondary interest as a self-settled trust for creditor claim purposes; thus likely triggering estate inclusion for estate tax purposes. See, for example, Rev. Proc. 76-103.

As to these protective state statutes, the North Carolina statute under N.C. Gen. Stat. Section 36C-5-505(c)(1) is an excellent, well-drafted statute for protecting a settlor spouse’s secondary interest. A copy of this NC statute in included in my recent SLAT speech outline I refer to at the end of this blog post. But, again simply having a protective state statute, even this NC statute, is of no value if the settlor’s secondary interest is a retained interest for federal estate tax purposes.

Not all is lost, however.

These excellent, protective state statutes do lay the foundation for some highly effective incomplete-gift SLAT and inter-vivos QTIP trust planning in situations where the settlor spouse’s funding of the trust is purposely designed as an incomplete gift for gift tax purposes. One might ask: so why bother with a SLAT or inter-vivos QTIP as an incomplete gift? My response is because the tremendous benefit of this incomplete-gift irrevocable trust set-up can provide outstanding asset protection and greater assurance the trust property will remain only within the settlor and beneficiary spouse’s family, and ultimately for their children. Reduces, as examples, the risk to the family assets of old-age, widow or widower predatory marriages, mismanagement of assets, Madoff schemes, etc.

(2) Divorce of the Spouses? This opens up numerous potential problems with SLAT planning well beyond the scope of this blog post. I address this topic much more fully in my SLAT outline referenced below. However, various planners who assert the SLAT can simply include a “movable” definition of “spouse”, or can effectively apply by its terms to a new subsequent spouse, are in my view simply wrong. In addition, most of the above protective state statutes I find dealing with a secondary interest for the settlor spouse mandate that the same beneficiary spouse to whom the settlor spouse is married at the time the trust is created must also continue as a beneficiary of the trust until that beneficiary spouse’s death. These statutes typically do not allow creative efforts in support of these shifting definitions of the beneficiary spouse.

(3) Long-Arm Jurisdictional Litigation Statutes. Any effort to create a trust in another state jurisdiction in order to avail the settlor spouse of more favorable laws in that state can quickly sink if the settlor’s home state’s long-arm jurisdiction statute can (easily in many cases) pull the out-of-state trust into the home state’s litigation arena.

This jurisdiction subject is too broad for this blog post. However, I cover this long-arm statute point and the above two preceding points in a comprehensive recent speech I gave on SLATs at the recent 67th Seattle Estate Planning Seminar. Click here for a pdf copy of my SLAT speech outline [this is a box.com link].

Also contact me if you have any questions or wish to discuss any of these points. james@ktlawllc.com

A More Convenient Death Listing for your Tangible Personal Property

NOTE: The supplemental document I discuss below is good for minor changes for lesser-valued tangible personal property. However, I would not use this separate document for tangible personal property with significant value or family sentiment. Instead, make any designations actually in your Will, or prepare a codicil, with the appropriate notary and two witnesses, etc. I see far too many seriously emotional disputes among family members fueled highly by fights over tangible personal property.

Now directly to the topic of this post. Georgia has a revised statute under O.C.G.A. Section 53-4-5 (effective January 1, 2021) that now allows a more convenient method of preparing a listing of your tangible personal property for your named beneficiaries at the time of your death. This statute applies only to tangible personal property; and not cash or intangible property. Tangible personal property is essentially your personal “stuff” that you can actually touch, such as jewelry, art, musical instruments, furniture, household items, clothing, automobiles, etc. Click here for Section 53-4-5.

Under Section 53-4-5 — after you have already signed your existing Last Will and Testament — you can prepare a separate, supplemental written document that describes the tangible personal property and the beneficiary who is to receive that item at your death. This document must: (i) be signed and dated by you (the testator); (ii) describe the items and the beneficiaries with reasonable certainty; and (iii) the option of using this separate document method must already be referenced in your Will. See the sample Will language below.

No notary or other witnesses are required under Section 53-4-5 for the above separate document. Although, the document I use refers to the option (but not a requirement) of including a notary signature. I recommend adding the notary so as to help reduce disputes over your signature, or that you were unduly influenced to sign the document, etc.

The required cross-reference to this method within your existing Will can be something along the line of the last sentence in the following sample provision:

4.2 This section 4.2 covers who at my death gets my tangible personal property,” defined generally as my personal items that are physically movable, such as automobiles, clothing, jewelry, watches, rings, art, household goods, furniture and furnishings, and other personal-use items generally similar to what I just described above that I own at my death.  I give all my tangible personal property outright to Jane, if she survives me, and if Jane does not survive me, [ . . . ] , or in accordance with any separate designation I make in writing subsequent to my execution of this Will with such separate writing referring specifically to this section 4.2 and to my date of execution of this Will.  

No-Contest Clauses; Still Only Slowly Evolving in Georgia

The Georgia court advance sheets recently included Slosberg v. Giller et al., No. S21G1226, Georgia Supreme Court (June 30, 2022) dealing with a no-contest clause in an irrevocable trust. The point of this blog post is that “no-contest clauses” in Georgia are still in a state of uncertain flux. Judicial opinions like this Slosberg case are part of the slow evolution of the body of law in Georgia for the design and use of these clauses.

In Slosberg a settlor created an irrevocable trust that, upon his death, left the bulk of the trust to his two daughters, and only a nominal amount to his son. The trust included a no-contest clause providing that any beneficiary who contested the validity of the trust would lose all benefits under the trust.

The son filed a lawsuit alleging his two sisters unduly influenced their father as to the creation and provisions of the trust document. After some head-spinning motion for summary judgment and jury trial activity in the trial court, a jury ultimately found undue influence existed with a result that the trial court ruled the trust was void.

But, the case then went up on appeal, and the Georgia Court of Appeals declared that the son nonetheless violated the no-contest clause by initiating the litigation, even though the jury found undue influence. See Giller v. Slosberg, 359 Ga. App. 867, 858 S.E.2d 747 (2021).

The Georgia Supreme Court reversed and held that a no-contest clause does not bar a beneficiary from asserting a claim for undue influence, referring to the longstanding Georgia common law rule that the valid formation of a trust may be challenged.

But, now here is the kicker. The Supreme Court went on to state that if an undue influence challenge fails, the challenging beneficiary is then deemed to have triggered against himself or herself the no-contest clause in the trust. A potentially quite costly Pyrrhic victory.

Here is my take. For years I have (and still do) complain that Georgia does not have a “probable cause” exception to filing challenges to a Will or trust that potentially might trigger a no-contest clause. See, for example, Duncan v. Rawls, 345 Ga. App. 345, 812 S.E.2d 647 (2018)(no good faith/probable cause exception exists under O.C.G.A. Section 53-12-22 [trust no-contest clauses]).

A probable cause exception could enable a claimant to challenge the validity of a trust document, but even if the challenger loses would not trigger the no-contest clause as long as the challenger had sufficient probable cause. There will remain a risk for a losing challenger; but a probable cause exception broadens the opportunity for potentially necessary challenges in some cases.

For example, a test case I wait for is a situation where a lawyer, or other close financial advisor with a confidential relationship to the settlor, himself or herself becomes a beneficiary in a trust, or in some other financially beneficial manner, etc., by potentially having unduly influenced the trust settlor.

Under current Georgia law without a probable cause exception, another beneficiary challenging the lawyer’s (or other advisor’s) potential undue influence may well be a risk the beneficiary simply cannot take. Or, more importantly, cannot afford to lose.

By contrast, if Georgia did have a probable cause exception, I would argue that any lawyer, or other advisor, who has placed himself or herself in a financially beneficial position within a client’s trust document — on its face — provides probable cause reasonably warranting a protected no-contest clause challenge.

Email me and I can send you copies of both this Slosberg opinion, and the Duncan opinion. james@ktlawllc.com

CPE / CLE in Seattle. October 24-25, 2022. Join Us.

As part of my shift away from litigation and return predominantly to trust and estate planning, I will be speaking at the 67th Annual Seattle Estate Planning Seminar, October 24-25, 2022 (Seattle, WA). Click here. My topic is “Will Your SLAT Fit the Right Slots?“. Come join us. The seminar blurb for my presentation is:

“The trust planning interest in SLATs (spousal lifetime access trusts) has become exponential over the past several months. Cocktail party fodder. Almost an effortless sell. This presentation touches on certain SLAT checklist items and potential pitfalls that may otherwise get overlooked in the SLAT design, such as the effect of divorce, substantive postnuptial agreement issues, creditor claims, the relation-back doctrine, long-arm litigation (jurisdiction) statutes, potential Code Section 2036 issues, cash-flow needs, and a brief commentary on fundamental differences with an inter-vivos QTIP trust.”

Adult Adoption. Expand Your Inheritance Grab?

The gist of this blog post is to make sure you know what “adoption” provisions exist in your estate planning documents. The recent Georgia testamentary trust case I discuss below goes directly to adoption, and provides fodder for some possible augmented, creative estate planning by use of adult adoption. I am not judging below whether such planning is good, bad, or appropriate; but, rather note there exist many creative minds in the field of estate planning.

The recent Georgia Court of Appeals opinion is Morse v. Suntrust Bank, N.A., No. A22A0200, 2022 Ga. App. LEXIS 242 (Ct. App. May 16, 2022). This opinion raises an important question about estate planning and adoption. In this instance, adoption of an adult.

Let me preface my comments with the point that I am in favor of the inclusion of adopted individuals in estate planning documents, subject to final decision by each client. I typically under the express language of the estate planning document (Will, trust, etc.) include a limitation that adopted persons must be adopted prior to the age of majority (e.g., 18).

In this Morse opinion the appeals court had to address a multi-generational family trust (a 1967 testamentary trust under a Will) that included equal subtrusts for each of 13 grandchildren named in the trust document. The trust included language also that the number of grandchildren would increase for any grandchildren “born to me, whether during my lifetime or after may death . . .”, with the number of grandchildren trusts to increase accordingly.

The trust also provided that if a grandchild dies without descendants, his or her share is divided and added equally to the other remaining trusts. The 1967 Will included no express exclusion of adult adoptees.

Here is the kicker:

One of the 13 named grandchildren (“Molly”) never had biological children. But, in 2018 Molly adopted two adults, ages 34 and 36. The trial court record included an acknowledgment by Molly that she adopted the two adults, in part, so that they could receive distributions from her trust share. The other trust beneficiaries objected to Molly’s inclusion of the two adopted adults as beneficiaries of her trust share under a judicial theory of “subterfuge”. This is a legal doctrine involving committing fraud on a court by doing something the law allows, but creating a circumstance the law otherwise seeks to avoid (or should seek to avoid). The trial court agreed with the opposing beneficiaries on this theory of subterfuge.

However, the Court of Appeals reversed the trial court, and rejected the subterfuge argument. The appeals court concluded the trust document placed no limitation on an adult adoption, neither did the applicable Georgia adult adoption statute include language contrary to Molly’s inclusion of the two adopted adults so as to make them beneficiaries of her trust share.

[This Morse case, dealing with a 1967 trust, involved the Georgia adoption statute that existed prior to the current version enacted in 1990. In my view, the pre-1990 and 1990 statutes are sufficiently similar so that the rational expressed by the appeals court in Morse would arguably apply to a trust or Will created 1990 and thereafter.]

So, again bottom line, see what your documents state about adoption, or if silent in reference to adoption. Also, review what language is in your document for a beneficiary’s limited power of appointment, such as a class of appointees “related” to the beneficiary by adoption or birth, etc. Creativity, especially in trust and estate litigation, is abundant. And, most often costly.

Email me and I will be glad to send you a pdf copy of the above Morse opinion, and the current Georgia adult adoption statute. james@ktlawllc.com

A Common, Explosive Estate Planning Landmine; the “Pretermitted Spouse”

Assume Dad remarries new-wife Jane after Mom’s (Susan) death. Dad does not update his 20-year old Will. And, assume Dad’s 20-year old Will still includes Mom as the primary beneficiary, with their children as the secondary beneficiaries in the event Mom predeceases Dad (which she did). This Will — on the surface — looks normal, without problem.

But, with this 20-year old Will there can be a substantial, unintended result. That is, in Georgia (with a variation of results in other states), at Dad’s death while married now to new spouse Jane, Dad’s remarriage to Jane does not operate to revoke entirely his 20-year old Will; but Dad’s Will will be deemed revoked to the extent necessary to give Jane an intestate share of Dad’s estate as though — only as to Jane — Dad died without a Will. Jane, in this example, is under the law referred to as a “pretermitted spouse”. The intestate share varies by state law; in Georgia a surviving spouse stands to receive no less than one-third (1/3) of the estate.

An exception to the above result arises if Dad’s 20-year old Will expressly contemplates a subsequent marriage, such as stating “In the event of my remarriage, all of the provisions of my Will shall remain fully effective with no provisions or benefits from my estate for any such subsequent spouse”, or language along this line. Note, Georgia case law provides that this contemplation of marriage provision in a Will does not have to contemplate or name a specific potential future spouse. It can be a general, unnamed contemplation provision.

This landmine caution is that I believe this remarriage surprise exists within many families where spouses have remarried, and either never updated their Wills for the new marriage or have Wills that in no manner address subsequent marriage. Or, are simply not aware of this issue.

A simple cure, in my opinion, is to include a contemplation of marriage provision in every married-couple’s Will, and then discuss during the drafting stage whether in specific cases the spouses prefer to exclude the contemplation language.

Sample language in the Will can be along the lines of this example:

“4.3   Contemplation of Remarriage. Although neither Susan nor I in any manner presently contemplate the occurrence of a divorce from one another or a remarriage to another spouse, if for any reason for purposes of this Will following my execution of this Will I enter into marriage with anyone else (other than Susan), my express and clear intention is that any such other spouse shall not receive any property from my estate nor under the provisions of this Will, with the result that all provisions in my Last Will and Testament shall remain fully in effect and unchanged by reason of my remarriage.”

You can google the Georgia pretermitted spouse statute O.C.G.A. Section 53-4-48. My above discussion is also for general purposes. Each client’s particular situation, and the applicable state law, need to be considered before including or excluding any such preventive provisions.

For 2022 I am Adding Simpler Estate Planning to My Law Practice

This blog post is to inform my readers that, beginning this year 2022, I am reducing substantially my trust and estate litigation practice. I am returning to a greater concentration on trust and estate planning, including flat-fee options for less costly, more-basic estate plans for certain clients who do not need the most complex planning available, and its inevitable higher fees. I will still handle complex planning, particularly for trusts, but will recommend simpler estate plans when appropriate.

Below are some observations that touch on my decision to return more fully to the above planning:

One. I admit I enjoy litigation, almost too much. [Ask my wife.] I love the aggressive warfare, complexity, strategy, the uncertainty, and the Sun Tzu “The Art of War” psychological aspects of the challenge. I thoroughly enjoy fighting opposing lawyers. But, after the past 15-years of intense litigation, I would like to see what life is like (both at the office and at home) without the effects on me of this constant warfare (and how the absence of this persistent aggression might play into a novel, interesting chapter both in my personal and professional life). I realize also I am simply not capable of handling litigation without my enjoyment of a heavy expenditure of aggression.

Two. Now that I have a few years (5 years) experience as a smaller-firm lawyer, it finally dawned on me that my previous 20+ years in the large law firm environment, at least for me, fueled a kind of intellectual pride that prevented me from being open to the notion of recommending simpler planning for clients, at least as an option. In a large firm setting, lawyers are understandably very proud of the elevated status and scope of their legal knowledge, and a large firm gives them an excellent platform in which to implement the most complex planning available, with the concomitant collection of larger fees. Simplicity does not invite accolades within a large law firm, and can be perceived as signalling laziness or lack of intellectual sophistication, etc. In other words, for many years for my estate planning work I had a great deal of pride in being able to demonstrate to my clients and my law partners the depth and complexity of my legal knowledge. This complex approach worked very well for the right kind of clients; but, not all clients need this vast level of unbridled complexity.

Three. The most important observation, however, is that it is the depth and complexity of a lawyer’s knowledge that can, or should, enable the lawyer to recommend simpler options, if simpler options are suitable for a particular client. A simpler option, in certain instances, may well be in the best interest of the client, but not in the best pecuniary interest of the lawyer. I also have said for years that an estate plan in which I am able to throw in every conceivable, complex feature and option is, in my experience, easier work than having to exercise judgment for designing and implementing a simpler plan. A simpler plan, ideally, requires that a lawyer be very well versed with the most complex planning so as to exercise good judgment as to when, and how, simpler options are suitable for a client.

Four. I will continue to keep up with all the latest estate and trust developments, including my yearly CLE attendance at the highly-informative University of Miami Law School “Heckerling Institute on Estate Planning”, so as to stay fully in the loop with the latest, complex planning options.