sign in sign up
<<
Home , Honorary trust, Legatee, Life insurance trust, Trust law

ANATOMY OF A TRUST

Tuesday, April 25, 2017 Albany

Wednesday, April 26, 2017 New York City | Live & Webcast

Thursday, April 27, 2017 Melville, L.I.

Tuesday, May 2, 2017 Syracuse (Liverpool)

NYSBA Co-Sponsors: Trusts and Estates Section Committee on Continuing

This program is offered for education purposes. The views and opinions of the faculty expressed during this program are those of the presenters and authors of the materials. Further, the statements made by the faculty during this program do not constitute legal advice.

Copyright ©2017 All Rights Reserved New York State Association Assistance Program 1.800.255.0569

Q. What is LAP? A. The Lawyer Assistance Program is a program of the New York State Bar Association established to help attorneys, , and law students in New York State (NYSBA members and non-members) who are affected by alcoholism, drug abuse, gambling, depression, other mental health issues, or debilitating stress. Q. What services does LAP provide? A. Services are free and include: • Early identification of impairment • Intervention and motivation to seek help • Assessment, evaluation and development of an appropriate treatment plan • Referral to community resources, self-help groups, inpatient treatment, outpatient counseling, and rehabilitation services • Referral to a trained peer assistant – attorneys who have faced their own difficulties and volunteer to assist a struggling colleague by providing support, understanding, guidance, and good listening • Information and consultation for those (, firm, and judges) concerned about an attorney • Training programs on recognizing, preventing, and dealing with addiction, stress, depression, and other mental health issues

Q. Are LAP services confidential? A. Absolutely, this wouldn’t work any other way. In fact your confidentiality is guaranteed and protected under Section 499 of the Law. Confidentiality is the hallmark of the program and the reason it has remained viable for almost 20 years.

Judiciary Law Section 499 Lawyer Assistance Committees Chapter 327 of the of 1993 Confidential information privileged. The confidential relations and communications between a member or authorized agent of a lawyer assistance committee sponsored by a state or local bar association and any person, firm or communicating with such a committee, its members or authorized agents shall be deemed to be privileged on the same basis as those provided by law between attorney and client. Such privileges may be waived only by the person, firm or corporation who has furnished information to the committee.

Q. How do I access LAP services? A. LAP services are accessed voluntarily by calling 800.255.0569 or connecting to our website www.nysba.org/lap Q. What can I expect when I contact LAP? A. You can expect to speak to a Lawyer Assistance professional who has extensive experience with the issues and with the lawyer population. You can expect the undivided attention you deserve to share what’s on your mind and to explore options for addressing your concerns. You will receive referrals, suggestions, and support. The LAP professional will ask your permission to check in with you in the weeks following your initial call to the LAP office. Q. Can I expect resolution of my problem? A. The LAP instills hope through the peer assistant volunteers, many of whom have triumphed over their own significant personal problems. Also there is that appropriate treatment and support is effective in most cases of mental health problems. For example, a combination of medication and therapy effectively treats depression in 85% of the cases. Personal Inventory

Personal problems such as alcoholism, substance abuse, depression and stress affect one’s ability to practice law. Take time to review the following questions and consider whether you or a colleague would benefit from the available Lawyer Assistance Program services. If you answer “yes” to any of these questions, you may need help.

1. Are my associates, clients or family saying that my behavior has changed or that I don’t seem myself? 2. Is it difficult for me to maintain a routine and stay on top of responsibilities? 3. Have I experienced memory problems or an inability to concentrate? 4. Am I having difficulty managing emotions such as anger and sadness? 5. Have I missed appointments or appearances or failed to return phone calls? Am I keeping up with correspondence? 6. Have my sleeping and eating habits changed? 7. Am I experiencing a pattern of relationship problems with significant people in my life (spouse/parent, children, partners/associates)? 8. Does my family have a history of alcoholism, substance abuse or depression? 9. Do I drink or take drugs to deal with my problems? 10. In the last few months, have I had more drinks or drugs than I intended, or felt that I should cut back or quit, but could not? 11. Is gambling making me careless of my financial responsibilities? 12. Do I feel so stressed, burned out and depressed that I have thoughts of ?

There Is Hope

CONTACT LAP TODAY FOR FREE CONFIDENTIAL ASSISTANCE AND SUPPORT The sooner the better! Lawyer Assistance Program 1.800.255.0569 Program Description

Revocable or Irrevocable? Lifetime or Testamentary? This Medicaid Income Only Trusts, Special Needs Trusts, Pet Trusts, QTIP comprehensive program will provide attendees with the fundamentals (Marital Deduction Trusts), Credit Shelter Trusts, Grantor Trusts and of creating various types of trusts. Not only will the speakers discuss Life Trusts, among others. This program is designed for how to draft the trust, but also when specific trusts are appropriate newly admitted attorneys, those new to and long term care based on a client’s needs and goals. The program will Irrevocable planning, or practitioners who want a refresher on trusts.

Who Should Attend: Newly admitted attorneys, attorneys new to the practice areas of estate and long term care planning, and practitioners looking for a refresher on trusts. Agenda 8:30 a.m. – 9:00 a.m. Registration 12:15 p.m. – 1:20 p.m. Lunch (on your own) 9:00 a.m. – 9:10 a.m. Introductory Remarks 1:20 p.m. – 1:45 p.m. Credit Shelter Trusts 9:10 a.m. – 10:00 a.m. What Is a Trust? • Permissible Terms of Credit Shelter Trust • Basics and Terminology • Powers of Appointment • Lifetime versus Testamentary • Disclaimer Funding of Credit Shelter Trust • Execution Requirements • Sample Will with Marital and Credit Shelter Trusts • Revocable versus Irrevocable • Defining the Credit Shelter Trust- Federal or NYS • Getting a Taxpayer Identification Number Exemption • Funding the Trust • Pecuniary v. Fractional Funding • Sample Revocable Trust (0.5 MCLE Credits – Skills) (1.0 MCLE Credits – Professional Practice) 1:45 p.m. – 3:00 p.m. Grantor Trusts and 10:00 a.m. – 10:50 a.m. Irrevocable Medicaid Income Only Trusts Trusts • Grantor Trust Rules - Estate and Income • Basic Medicaid Eligibility Rules Considerations • Required Terms of Trust - Income versus Principal • Intentionally Defective Grantor Trusts • Bells and Whistles - EPTL 7-1.9, Lifetime and • Irrevocable Life Insurance Trusts Testamentary Powers of Appointment • Sample • Protecting Residence Within Irrevocable Trust (1.5 MCLE Credits – Skills) • Sample Medicaid Trust 3:00 p.m. – 3:10 p.m. Break (1.0 MCLE Credits – Skills) 3:10 p.m. – 4:00 p.m. Pet Trusts 10:50 a.m. – 11:00 a.m. Break • Why Wills Do Not Suffice for Pet Care 11:00 a.m. – 11:50 a.m. Supplemental Needs Trusts • Anatomy of a Pet Trust and Its Unique Provisions • Basics and Required Terms • Funding Pet Trusts • First Party versus Third Party • Tax Provisions relating to Pet Trusts • Lifetime versus Testamentary (1.0 MCLE Credits – Skills) • Coordination with Medicaid and SSI 4:00 p.m. – 4:50 p.m. Ethical Considerations in • Sample Third Party Representing (1.0 MCLE Credits – Skills) • Introduction 11:50 a.m. – 12:15 p.m. QTIP (Marital Deduction Trusts) • The Rules • Overview of Federal and NYS Estate Tax Rules - • Conflicts and Duties Exemptions, Marital Deduction • Confidentiality and • Requirements of QTIP Trusts • Engagement Letters and Strategies • Lifetime v. Testamentary • Attorney’s Fees/Applicaations for Attorneys Fees (0.5 MCLE Credits – Skills) (1.0 MCLE Credits – Ethics) 4:50 p.m. – 5:00 p.m. Q & A Session Program Faculty Overall Planning Chair Melville, L.I. Faculty: Sylvia E. Di Pietro, Esq., Law Office of Sylvia E. Di Pietro, Esq., LLC, New York City Spencer L. Reames, Esq., Farrell Fritz, Uniondale , Ronald Fatoullah & Associates, Great Neck Local Faculty Chairs: Ronald A. Fatoullah, Esq. , The Law Office of Marchese & Maynard, LLP, Patricia Shevy, Esq., The Shevy Law Firm, LLC, Albany Robin S. Maynard, Esq. Manhasset Lenore S. Davis, Esq., Attorney at Law, Woodmere Avi Z. Kestenbaum, Esq., Meltzer, Lippe, Goldstein and Breistone, LLP, Albany Faculty: Mineola Michael D. Dezik, Esq., Wilcenski & Pleat, PLLC, Clifton Park Marianna Schwartsman, Esq., Attorney at Law, New York City Tara Anne Pleat, Esq., Wilcenski & Pleat, PLLC, Clifton Park Audrey Patrone Peartree, Esq., Harris Beach PLLC, Pittsford Lucy Kats, Esq., Whiteman Osterman & Hanna, LLP, Albany Lenore Sharon Davis, Esq., Attorney at Law, Woodmere Thomas J. Collura, Esq., Hodgson Russ, LLP, Albany Ian MacLean, Esq., MacLean Law Firm, P.C., New Yorker City Audrey Patrone Peartree, Esq., Harris Beach, PLLC, Pittsford Phillip M. Tribble, Esq., Tribble Law, Clifton Park Syracuse (Liverpool) Faculty: Mary C. King, Esq., Hancock Estabrook, LLP, Syracuse New York City Faculty: Robert D. Scolaro, Esq., Scolaro Perry Law, P.C., Fayetteville Sylvia E. Di Pietro, Esq., Law Office of Sylvia E. Di Pietro, Esq., LLC, New York City Luke A. Beata, Esq., Hancock Estabrook, LLP, Syracuse Elizabeth Forspan, Esq., Ronald Fattoullah & Associates, Great Neck Ryan T. Emery, Esq., Mackenzie Hughes, LLP, Syracuse Avi Z. Kestenbaum, Esq., Meltzer, Lippe, Goldstein and Breitstone, LLP, Michael E. O’Connor, Esq., Costello, Cooney & Fearon, PLLC, Syracuse Mineola Alicia Calagiovanni, Esq., Costello, Cooney & Fearon, PLLC, Syracuse Marianna Schwartsman, Esq., Attorney at Law, New York City Anthony A. Marrone, II, Esq., The Marrone Law Firm, P.C., E. Syracuse Lenore S. Davis, Esq., Attorney at Law, Woodmere Kim Rothman, Esq., Miller Mayer, LLP, Ithaca Ian W. MacLean, Esq., MacLean Law Firm, P.C., New York City Veronica Escobar, Esq., The Law Offices of Veronica Escobar, Forest Hill Marianna Moliver, Esq., Attorney at Law, New York City

NYC PROGRAM AGENDA

Anatomy of a Trust

Tuesday, April 25, 2017 – NY State Bar Association, One Elk St., Albany Wednesday, April 26, 2017- AMA Conference Center, 1601 Broadway, NY, NY Thursday, April 27, 2017 – Melville Marriott, 1350 Walt Whitman Rd, Melville, NY Tuesday, May 2, 2017 – Holiday Inn, 441 Electronics Pkwy, Liverpool, NY

7.5 MCLE Credits (5.5 skills, 1.0 professional practice, 1.0 ethics)

8:30 a.m. – 9:00 a.m. Registration

9:00 a.m. – 9:10 a.m. Introductory Remarks

9:10 a.m. – 10:00 a.m. What is a Trust?

. Basics and Terminology . Lifetime versus Testamentary . Execution Requirements . Revocable versus Irrevocable . Getting a Taxpayer Identification Number . Funding the Trust . Sample Revocable Trust

(1.0 MCLE Credits – Professional Practice)

10:00 a.m. – 10:50 a.m. Irrevocable Medicaid Income Only Trusts

. Basic Medicaid Eligibility Rules . Required Terms of Trust - Income versus Principal . Bells and Whistles- EPTL 7-1.9, Lifetime and Testamentary Powers of Appointment . Protecting Residence Within Irrevocable Trust . Sample Medicaid Trust

(1.0 MCLE Credits – Skills)

10:50 a.m. – 11:00 a.m. Break

11:00 a.m. – 11:50 p.m. Pet Trusts

. Why Wills Do Not Suffice for Pet Care . Anatomy of a Pet Trust and Its Unique Provisions . Funding Pet Trusts . Tax Provisions relating to pet trusts

(1.0 MCLE Credits – Skills)

11:50 p.m. – 12:15 p.m. QTIP (Marital Deduction Trusts)

. Overview of Federal and NYS Estate Tax Rules - Exemptions, Marital Deduction . Requirements of QTIP Trusts . Lifetime v. Testamentary

(0.5 MCLE Credits – Skills)

12:15 p.m. - 1:20 p.m. Lunch (on your own)

1:20 p.m. - 1:45 p.m. Credit Shelter Trusts

. Permissible Terms of Credit Shelter Trust . Powers of Appointment . Disclaimer Funding of Credit Shelter Trust . Sample Will with Marital and Credit Shelter Trusts . Defining the Credit Shelter Trust- Federal or NYS Exemption . Pecuniary v. Fractional Funding

(0.5 MCLE Credits – Skills)

1:45 p.m. - 3:00 p.m. Grantor Trusts and Life Insurance Trusts

. Grantor Trust Rules - Estate and Income Tax Considerations . Intentionally Defective Grantor Trusts . Irrevocable Life Insurance Trusts . Sample Life Insurance Trust.

(1.5 MCLE Credits – Skills) 3:00 p.m. - 3:10 p.m. Break

3:10 p.m. - 4:00 p.m. Supplemental Needs Trusts

. Basics and Required Terms . First Party versus Third Party . Lifetime versus Testamentary . Coordination with Medicaid and SSI . Sample Third Party Supplemental Needs Trust

(1.0 MCLE Credits – Skills)

4:00 p.m. – 4:50 p.m. Ethical Considerations in Representing Fiduciaries

. Introduction . The Rules . Conflicts and Duties . Confidentiality and Privilege . Engagement Letters and Conflict of Interest Strategies . Attorney’s Fees/Applications for Attorney Fees

(1.0 MCLE Credits – Ethics)

4:50 p.m. – 5:00 p.m. Q & A Session

TABLE OF CONTENTS

I.WHAT IS A TRUST?

Trust Overview ...... 001 Powerpoint – Trust Overview ...... 045 by Patricia J. Shevy, Esq.

II. IRREVOCABLE MEDICAID INCOME ONLY TRUSTS

Sample Trusts ...... 079 Powerpoint – Irrevocable Medicaid Income Only Trusts ...... 111 by Elizabeth Forspan, Esq.

III. QTIP (MARITAL DEDUCTION TRUSTS) AND CREDIT SHELTER TRUSTS

Part I - A Closer Look at Q-Tip Trusts ...... 137 Part II – A Closer Look at Credit Shelter Trusts ...... 156 by Avi Z. Kestenbaum, Esq. and Marianna Schwartsman, Esq.

IV. GRANTOR TRUSTS AND LIFE INSURANCE TRUSTS

Demystifying Grantor Trusts ...... 171 Sample Irrevocable Trust Agreement ...... 203 by Audrey Patrone Peartree, Esq.

V. PET TRUSTS

Pitfalls in Pet Planning ...... 231 Powerpoint - Until Do Us Part‐Pets and ...... 241 Sample Trust Agreement ...... 265 by Lenore Davis, Esq.

VI. SUPPLEMENTAL NEEDS TRUSTS

Sample Third Party Supplemental Needs Trust...... 279 Powerpoint – Supplemental Needs Trust ...... 291 by Elizabeth Forspan, Esq.

VII. ETHICS

Ethical Considerations in Representing Fiduciaries ...... 309 by Ian William MacLean, Esq.

The Application of the Attorney-Client Privilege in Revocable Trust Contests ...... 335 by Robert M. Harper (submitted by Ian William MacLean)

Recent Amendment Creates Further Exception to Attorney-Client Privilege ...... 339 by Ilene S. Cooper, Esq. (submitted by Ian William MacLean)

Trust Overview

by

Patricia J. Shevy, Esq. The Shevy Law Firm, LLC Albany

1

2 Trust Overview Patricia J. Shevy The Shevy Law Firm, LLC

Major Terms Defined

Before drafting a trust, the draftsperson must have a basic understanding of the people involved, and the role of each person in the administration of the trust. Selected definitions under NY Surrogate’s Procedure Act (SCPA) §103 (for purposes of the SCPA) follow:

. . Any person entitled to any part or all of an estate.

. Corporate . Any trust , any bank authorized to exercise powers and any national bank having a principal, branch or trust office in this state and duly authorized to exercise fiduciary powers.

. Fiduciary. An administrator, administrator c.t.a., administrator d.b.n., ancillary administrator, ancillary administrator c.t.a., ancillary executor, ancillary guardian, executor, guardian, preliminary executor, temporary administrator, testamentary trustee, to any of whom letters have been issued, and also the donee of a power during minority and a voluntary administrator and a public administrator acting as administrator or a public administrator or county treasurer to whom letters have been issued, and a lifetime trustee.

. Grantor. The creator of a lifetime trust. Also called a .

. Individual trustee. Any trustee who is not a corporate trustee.

. Lifetime trust. An , including all amendments thereto, created during the grantor's lifetime other than a trust for the benefit of creditors, a resulting or , a business trust where certificates of are issued to the beneficiary, an investment trust, voting trust, a security instrument such as a of trust and a mortgage, a trust created by the or of a court, a or reorganization trust, a trust for the sole purpose of paying dividends, interest, interest coupons, salaries, wages, or profits, instruments wherein persons are mere

3 nominees for others, or a trust created in deposits in any banking institution or savings and loan institution.

. Lifetime trustee. A trustee acting under a lifetime trust.

. . Anything that may be the subject of and is real or , or is a chose in action.

. . A trust created by Will.

. Testamentary trustee. Any person to whom letters of trusteeship have been issued.

. Trust. A testamentary trust or a lifetime trust.

Major Laws Governing Creation and Administration of Trusts

Article 7 of the NY Estates, Powers and Trusts Law (EPTL) governs the administration of trusts in New York State. Also of importance to the administration of trusts are EPTL Article 11 (Fiduciaries: Powers, Duties and Limitations) and Article 11-A (Uniform Principal and Income Act). Sections of note include:

. EPTL §7-1.4: An express trust may be created for any valid purpose.

. EPTL §7-1.9(a): Upon the written, acknowledged of all persons beneficially interested in a trust (grantor, trustee, current and presumptive beneficiaries), the grantor can amend or revoke an otherwise irrevocable trust (in whole or in part). Only permissible if all persons beneficially interested are competent adults.

. EPTL §7-1.12: Supplemental Needs Trust (to be discussed in further detail separately).

. EPTL §7-1.14: Any person (a natural person, an association, board, any corporation, court, governmental agency, authority or subdivisions, partnership or other firm and the state under EPTL §1-2.12) may by lifetime trust dispose of real and personal property. A natural person must be at least age 18.

4

. EPTL §7-1.16: A lifetime trust is irrevocable unless it expressly provides that it is revocable.

. EPTL §7-1.17(a): A lifetime trust shall be in writing and executed and acknowledged by the grantor and at least one trustee (who may be grantor) in the manner required for the of a deed; or in lieu of acknowledgement, 2 .

. EPTL §7-1.18: A lifetime trust is valid as to any assets therein to the extent the assets have been transferred to the trust.

. EPTL §7-1.19(a): Any trustee or beneficiary may petition to terminate an uneconomical trust.

Who are the Main Parties? Their Duties and Responsibilities to a Trust

The main parties to a trust are the grantor (the person who created the trust), the Trustee (the person managing the trust), and the beneficiaries (the person for whom the trust was created and who has a beneficial interest in the trust assets). When reviewing a Trustee’s actions, it is important to remember that not only must the effect on the current beneficiaries be considered, but also that of the presumptive and contingent remainder beneficiaries.

EPTL Article 11 includes the powers, duties and limitations of .

. EPTL §11-1(b): a detailed list of Trustees’ powers is included here and should be reviewed. If additional powers are required, they should be expressly included in the trust document.

. EPTL §11-1.6: Every fiduciary shall keep property received as a fiduciary separate from his/her individual property.

EPTL §11-2.1 (the Principal and Income Act) sets forth how trust assets and expenses are allocated between income and principal.

. EPTL §11-2.1: The determination of a receipt or disbursement as principal or income (or partly to each) is governed first by the ; or in accordance with EPTL

5 §11-2.1 (if not specified in trust); or in accordance with what is reasonable and equitable to those entitled to income and principal. EPTL §11-2.1(a)(1). If the trust instrument gives the Trustee discretion in crediting a receipt or disbursement to income or principal (or partly to each), no inference that the Trustee has or has not improperly exercised such discretion arises from the fact that the Trustee made an allocation contrary to EPTL §11- 2.1.

. EPTL §11-2.1(b)(1): defines income as the “return in or property derived from the use of principal,” including return received as rent from property; interest on money lent; corporate distributions (discussed in further detail below); accrued income on bonds (discussed in further detail below); receipts from principal used in a business (discussed in further detail below); receipts from the disposition of natural resources (not discussed as not applicable); receipts from other principal subject to depletion (discussed in further detail below); and receipts from the disposition of underproductive property (discussed in further detail below).

. EPTL §11-2.1(b)(2): defines principal as “property, disposed of in trust, the income from which is payable to or to be accumulated for an income beneficiary and the to which is ultimately to vest in the person entitled to the future estate,” and includes received on the sale or transfer of principal, on the repayment of a loan or as a refund, replacement or change in the form of principal; proceeds resulting from eminent domain; insurance proceeds other than proceeds from an income beneficiary’s separate interest; stock dividends; receipts from bonds; royalties; receipts from principal subject to depletion; any resulting from any change in the form of principal; and receipts from the disposition of underproductive property.

. A summary of what constitutes income versus principal under the Principal and Income Act follows:

Interest and Dividends (Normal Income Investments) Capital Gains (Normal Investments) Principal Business Income Income (Generally Accepted Principles)

6 Business Loss Principal Proceeds from Sale of Business Assets (not Principal inventory) Refunds Principal Fiduciary Fees Annual Commissions- 1/3 Income, 2/3 Principal; 1% principal commission from Commission Investment Management Fees 1/3 Income, 2/3 Principal

Outright Gifts

Before a discussion involving the drafting of trusts, lifetime gifting must be considered. Lifetime gifts offer clients important savings for both estate and income tax purposes and remain one of the most important tools in estate planning. An outright is most appropriate when the donor wants the donee (recipient) to have maximum freedom in owning and controlling the property. Outright gifts shift the taxability of income and save estate . Outright gifts may also include transfers of partial interests (such as legal life estates, remainders and other present and future interests). An outright gift is most appropriate when the donor wants the donee to have maximum freedom in owning and controlling the property.

Section 2503 of the (the “Code”) allows an exclusion from taxable gifts for present interests given to each donee each year up to specified amount. The current annual exclusion is $14,000. The annual exclusion is tied to inflation, but may only be increased in increments of $1,000.

The annual exclusion is allowed only for a gift of a present interest (an “unrestrictive right to the immediate use, , or enjoyment of property or the income from property”). Future interests (reversions, remainders, and other interests or estates, whether vested or contingent, which are limited to commence in use, possession, or enjoyment at some future time) do not qualify for the gift tax annual exclusion. Gifts of future interests must be reported at their full value, and the annual exclusion is barred. Future interests can be converted to present interests for gift tax purposes by giving the recipient a “Crummey” withdrawal power—a power to take immediate possession and control of the contribution for a limited

7 period of time. “Crummey” powers are discussed in further detail in the Life Insurance Trust section of this program.

Revocable Trusts

The Revocable or Living Trust is currently very popular among elderly clients and their attorneys. Many clients believe that the Revocable Trust will work to reduce or eliminate estate tax. Others are under the impression that the Revocable Trust will protect assets in the case of nursing home placement. Still others think that if they have a Revocable Trust, there is no need for them to also have a Will. It is important that the drafting attorney be able to correct each of the above misconceptions when advising clients and particularly when reviewing existing Revocable Trusts prepared by other attorneys. A sample, simple revocable trust with explanatory footnotes is attached to these materials.

The advantages of using a Revocable Trust often cited by estate planning attorneys include:

Avoiding ; Maintaining privacy; Avoiding ancillary probate; Avoiding Will contests; Quick disposition; and Asset management.

Avoiding Probate: Many clients believe that one of the most important concerns in estate planning is to avoid probate. There may be times when a particular client has already experienced the probate process with the estate of a close family member and not had a good experience. There is time, expense and judicial impediments that can arise during the probate of a Will (a subject for another seminar); however, in many New York State counties probate is not the horror that is commonly portrayed. An attorney with experience in a particular county will know the intricacies of that particular court. Where waivers of citation may be easily obtained from all beneficiaries, probate is not time consuming or expensive. Further, a client may want court supervision if the client anticipates a fight or there are minor beneficiaries- the Court will

8 appoint a guardian ad litem (a lawyer) to review the actions of the executor on behalf of a minor or otherwise disabled beneficiary.

Privacy: There is no requirement that a person be rich and famous to want privacy. Many clients do not want their estates made public. They may not want the public to know which heir receives what property. As a private , an inter vivos (lifetime) Revocable Trust is not a public document and is therefore not subject to inspection by the or the general public. However, if the Revocable Trust is not fully funded and a pour over Will is used to transfer any remaining assets into the Revocable Trust at death, the Court will frequently require that the Revocable Trust be filed with the Will in the probate proceeding, thereby removing the “privacy” advantage.

No Ancillary Probate: In addition to determining whether an estate is subject to the probate process, a similar determination must be made in each state where the decedent owns property. Where a Revocable Trust holds located in a different from where the decedent resides, title to the property continues to be held by the trust upon the grantor’s death. Therefore, there will be no need for probate in another state (ancillary probate). For example, if the grantor’s primary residence is New York, but the grantor also owns a home in Massachusetts, the grantor may transfer the Massachusetts to a Revocable Trust, thereby avoiding probate in both states. Avoiding ancillary probate does not remove real property from the situs state for state estate tax purposes.

Avoid Contests: Although a trust instrument can be subject to challenge, it is more difficult to challenge an agreement that has been in effect during a grantor’s lifetime. It is important to note that a Revocable Trust is not sufficient to defeat a right of election of the decedent’s surviving spouse or to protect assets from the surviving spouse’s long term care expenses (Medicaid eligibility). Avoiding contests is particularly important when the client is gay and wants his or her assets to be distributed to his or her domestic partner or other non- spouse individual. If the client’s only surviving family includes non-approving family members, these family members may to challenge the Will as distributees. Remember that during the probate of a Will, the decedent’s distributees must either sign or Waiver of Citation or be served with a citation, thereby opening the door for objections.

9 Quick Disposition: The statutory creditor period (7 months from the appointment of the executor by the Court) does apply- meaning that if the executor distributes the estate assets to the beneficiaries during the statutory creditor period, the executor can be held personally liable for the decedent’s debts. The Revocable Trust provisions may provide for disposition to named beneficiaries on the death of the grantor, or in some other manner. Depending on the complexity of the decedent’s estate, assets passing pursuant to the Revocable Trust may save several months. This becomes important where a family business is involved or where a constant flow of income is crucial.

Asset Management: With respect to Revocable Trusts, if the grantor is also named as Trustee, the Revocable Trust is his or her “alter ego” and he or she retains complete control over the trust and its assets. This allows the grantor to manage the assets and make any necessary changes if needed to accomplish his or her goals. New York State has abolished the merger doctrine, allowing the grantor to act as sole Trustee, thereby removing the need for a co-Trustee. The Revocable Trust may also provide trustee succession provisions that do not require court involvement, providing ease in the transfer of fiduciary duty upon the grantor’s incapacity or death.

Professional Management: The grantor/trustee may retain a financial professional to manage assets in the trust for the grantor’s benefit. This may be important where the grantor lacks expertise or interest in managing trust assets such as real estate, stock funds, or even a valuable art collection. The grantor/trustee may also change advisors if necessary.

Incapacity: Although an attorney-in-fact/agent named pursuant to a valid, durable power of attorney may manage assets on behalf of an incapacitated person, a Revocable Trust may provide the Trustee with much greater flexibility, control and authority in managing the trust assets. Many attorneys-in-fact/agents have experienced problems with having various financial institutions honor a power of attorney document. Although the banks or other financial institutions are most often unjustified in refusing to recognize the power of attorney, it is a pervasive problem within the community. Conversely most institutions will recognize the authority of the Trustee. However, they may require that a full copy of the trust instrument be provided.

10 A Revocable Trust should be considered for New York clients in the following cases:

The client owns real estate in a foreign jurisdiction (another state). The client has a domestic partner or other non-spouse individual who the client wants to inherit. The client is involved in a non-traditional family relationship (i.e. second or no marriage). The client wishes to keep something private. The client may move to a state where probate is more complex. The client may acquire real estate, such as a vacation home or a retirement home, in another state.

Irrevocable Trusts

Irrevocable trusts are used for a myriad of purposes, although they are mostly tax related. Many times a single type of irrevocable trust can be used for a variety of different tax purposes. For example, an irrevocable life insurance trust with Crummey withdrawal rights is used to make gifts that qualify for the annual exclusion and exclude life insurance from the grantor's estate.

Inter vivos irrevocable trusts include the following:

Basic irrevocable trusts, Medicaid income only trusts; Crummey withdrawal or demand; Generation-skipping and dynasty trusts; and Specialized trusts, such as educational trusts and incentive trusts.

Grantor trusts are those trusts whose income is taxable to the grantor under Sections 671 through 679 of the Code. A Revocable Trust is a grantor trust because of its revocability by the grantor. An irrevocable trust is a grantor trust if grantor has a reversionary interest in the trust assets or has retained certain powers (“strings”) over the trust.

On occasion, an irrevocable inter vivos trust is made a “defective grantor trust” on purpose; that is, the trust is drafted with certain retained powers (“strings”) by the grantor that

11 cause the trust's income to be taxed to the grantor but that do not cause inclusion of the trust assets in the taxable estate of the grantor. Since the Code requires the grantor to recognize the trust's income and pay the income taxes on that income, the trust's beneficiaries receive the income intact. The taxes paid by the grantor are, in essence, an additional gift to the beneficiaries. However, the gift is not subject to federal gift tax, because the income tax payments are not voluntary but are required by law.

Grantor trusts include annuity or unitrusts that allow the grantor to retain an income or unitrust interest in the trust assets for a period of years before the assets vest in the name of the other beneficiaries. Contributions to these grantor-retained annuity and unitrusts (GRITs, GRATs and GRUTs) result in a gift to the beneficiaries equal to the value of the contribution to the trust less the value of the grantor's retained interest for the trust term. These trusts allow the grantor to divest himself or herself of the future appreciation without giving up the income immediately. The value of the gift to the beneficiaries is discounted by the actuarial value of the grantor's retained interest. There are special trusts that allow this same treatment if the trust is funded with the grantor's residence or a vacation home (qualified personal residence trust or QPRTs).

Grantor trusts include the following types of trusts:

Lifetime QTIP (Qualified Terminable Interest Property) trusts; Grantor-retained annuity trusts (GRATs) and unitrusts (GRUTs); Grantor-retained income trusts (GRITs) for nonfamily members; Qualified personal residence trusts and personal residence trusts (QPRTs); and -Defective ally Grantor “defective” trusts.

Determining Your Client’s Planning Needs

Before recommending the use of a revocable or an irrevocable trust, it is important to have a sense of whether the objectives of a client warrant creating a trust. The following may assist in the analysis of whether an irrevocable trust will be useful for the client:

12

The intended beneficiaries do not have investment experience, knowledge, skills, or desire to gain the experience, knowledge or skills. The client wants another person or an institution to decide who will be a beneficiary and what a beneficiary is to receive. The client wants to shift an income tax burden from himself or herself to a trust or another party. The client wants to plan for Medicaid eligibility. The client wants to control when and how a beneficiary will receive income or principal from a gift. The client wishes to make a gift, but does not want the beneficiary/donee to have immediate access to the money or property. The client wishes to make a gift, but wants to retain the income from the money or property for a period of time. The client wants to skip one or more generations for purposes of reducing transfer taxes on property as it passes from generation to generation. The client wants to avoid the capital gain tax on assets that have a low basis. The client wants to maximize gift making, even to the extent of paying the income tax liability on the gifts. The client wants to divest him/herself of life insurance but wishes to indirectly control the use of the policy's cash value and policy proceeds on death.

Getting a Taxpayer Identification Number

There are varying opinions whether certain trusts should obtain a separate federal taxpayer identification number. For revocable trusts, during the lifetime of the grantor, the trust can use the grantor’s Social Security Number. Upon the death of the grantor, the use of the grantor’s Social Security Number is no longer acceptable. A taxpayer identification number must be obtained.

The need for a taxpayer identification number for irrevocable trusts is a bit more complicated. So long as a trust is a “grantor trust” and all income is distributed to or for the

13 benefit of the Grantor, no federal taxpayer identification number is required while Grantor serves as Trustee or Co-Trustee. Under those circumstances, the trust uses the Grantor’s personal social security number as the trust’s taxpayer identification number. See Treas. Reg. 301.6109- 1(a)(2)(i). Even if the Trustee is not a Grantor (as is the case for Medicaid income only trusts), a trust that is a grantor trust may elect to report for tax purposes under the social security number of a Grantor, or may elect to obtain a taxpayer identification number. Specific powers within a trust establishing the Trust as a “grantor trust” include (1) the requirement that all income be distributed to the Grantor, (2) the power of the Grantor to change the beneficiaries; and (3) the power of the Grantor to substitute Trust property. Reporting method choices for such trusts are covered by Treas. Reg. 1.671-4(b), a copy of which is attached to these materials.

To obtain a taxpayer identification number, form SS-4 must be submitted to the IRS. The IRS has an online application that allows almost instantaneous issuance for the taxpayer identification number. The link is: https://www.irs.gov/businesses/small-businesses-self- employed/apply-for-an-employer-identification-number-ein-online. Form SS-4 is available on the IRS website- be sure that when you complete the form that an individual is listed as the designated representative as the IRS will not speak with just anyone from your office.

Funding the Trust

Schedule A means nothing. There are many misconceptions regarding trust funding. Many of the software packages (and old-fashioned trusts) include “Schedule A” after the trust document as a means of listing the various assets held in the trust. Clients, social workers, Social Services case workers want to see Schedule A, and afford it meaning incorrectly. Listing an asset on Schedule A does not effectively transfer title/ownership of that asset into the trust.

It is important to remember that a revocable trust is only effective for probate avoidance purposes to the extent that the revocable trust is funded. If there are individually-owned assets remaining outside the trust (not controlled by beneficiary designation or joint ownership), probate will be required.

When real estate is transferred to a trust, it must be accomplished by deed filed in the applicable county clerk’s office. If you are assisting a client with transferring real estate into the

14 trust, be careful. Provide yourself with protection if a title abstract is not obtained, i.e. “The deed prepared by our office will be based upon the deed and tax bills that we ask you to provide. We will not conduct an examination of title. Without a title opinion or title insurance to update the property descriptions, we will have no way of knowing whether there is any problem in using the property descriptions in your original . If you are concerned or if you have subdivided or sold any portion of the property, we suggest a title search be performed before transferring title to the Trust.”

When transferring bank accounts, stocks, mutual funds, and other investments, the actual account must be re-titled in the name of the trust. Many clients hold various stocks in certificate form or in direct registration with the stock transfer agent. To transfer the stocks to the trust, the stocks must be re-registered in the name of the trust. The stock transfer agents have the necessary forms on their websites, and attorneys can assist their clients with the transfer. The forms will require a medallion guarantee. If original stock certificates are being sent to the stock transfer agent, be sure that they are sent in a secure manner with insurance to cover lost stock certificate fees.

Insurance which provide for payments to be made if there is loss or damage to assets held in trust (for example, the insurance on your home) should be amended once the assets is transferred into a trust. The Trustee and the Trust should be named as additional insured parties. The Grantor, as an individual, should continue to be named as an insured party even though the trust and Trustee are added as additional insured parties.

15

ESTATE PLANNING WORKSHEET

First Middle Initial Last (Self)

Date of Birth Social Security Number

First Middle Initial Last (Spouse)

Date of Birth Social Security Number

Address Street City State Zip

Phone Numbers: Home Work- Self

Work- Spouse Cell- Self

Cell- Spouse Email:

Marital :  Married  Divorced  Separated  Single (including widowed)

Do you presently have a will?  Yes  No Do you presently have a trust?  Yes  No Were there any previous ?  Yes  No Do any of your children or other beneficiaries have disabilities?  Yes  No Do you own a farm or business?  Yes  No Are you a U.S. citizen?  Yes  No Are there any serious health problems?  Yes  No If yes, please describe briefly: Do you own a long-term care (nursing home) insurance policy?  Yes  No

Please bring copies of any existing estate planning documents with you to our meeting.

16 CHILDREN, GRANDCHILDREN OR OTHER BENEFICIARIES

Name Address Phone Number Date of Birth Relationship

ASSET/LIABILITY INFORMATION

Please list your asset/liability information in the appropriate category below. Attach a separate page if necessary. While exact amounts are not necessary, a realistic estimate for each account is required to provide us with the information required to make the proper recommendations.

Type of Asset Title in Which Held Type of Property Current (Self, Spouse, Joint, Joint (Residential, Value with Another Person) Commercial)

REAL ESTATE (Include address. Bring deed and tax bill if considering Medicaid planning.)

Personal Residence

Vacant Land

Other:

17

LIQUID ASSETS (Include Financial Institution; Account Numbers are not necessary.)

Type of Asset Title in Which Held Type of Property Current (Self, Spouse, Joint, Joint (Residential, Value with Another Person) Commercial)

Checking Accounts

Savings Accounts

Certificates of Deposit

Money Market Accounts

Equity in Business  Sole Prop.  Partnership  Corporation  LLC

Notes and Loans Receivable

Pension/Profit Sharing Owner Beneficiary

Life Insurance Owner Beneficiary Cash Death Value Benefit

18

Retirement Accounts, Owner Beneficiary Value IRAs, 401(k)s, 403(b)s, Deferred Compensation

Other Assets

Liabilities Name Loan Taken In: Amount Owed (Self, Joint, Other)

GIFT TAX RETURNS

Have gift tax returns ever been filed to report gifts made? If yes, please bring copies of the returns to your appointment.

APPOINTMENTS

1 . (Executor). The Executor is responsible for administering your estate (paying bills and making distributions to beneficiaries), and probating your Will. Please include addresses and phone numbers.

EXECUTOR: ALTERNATE: SECOND ALTERNATE:

2. HEALTH CARE AGENT. Who should be named to make medical decisions on your behalf including decisions regarding medical , life support issues and nursing home if you were unable to make these decisions yourself? It is not necessary to appoint the same person who is your successor trustee or personal representative as your health care agent. Please include addresses and phone numbers.

HEALTH CARE AGENT: ALTERNATE: SECOND ALTERNATE:

19

3. AGENT UNDER POWER OF ATTORNEY. Who should be named to transact business in your name in the event you become disabled or incompetent?

AGENT: ALTERNATE:

PLAN OF DISTRIBUTION

1. SPECIFIC GIFTS. Do you want to make charitable gifts, such as to a church or other charity? Do you wish to make a special gift to a particular person, such as jewelry or a family ?

Briefly describe where you would want assets remaining after any specific gifts are distributed. (Don’t worry about tax planning or other considerations in answering this question. We’ll consider those details later if needed.)

PLEASE COMPLETE THIS SECTION ONLY IF YOU HAVE MINOR BENEFICIARIES OR BENEFICIARIES WITH DISABILITIES

1. GUARDIAN. If you have minor children or an incompetent child, you will need to appoint a guardian. The guardian is responsible for the day-to-day care of the child. It is a good idea to name an alternate guardian in the event your first choice cannot serve.

GUARDIAN: ALTERNATE:

2. TESTAMENTARY TRUSTEE. You may need a trustee to manage assets for children until they reach an age when you believe they should be capable of managing property on their own. The trustee can be a relative, friend, or other person you trust to manage and distribute assets according to your wishes. The testamentary trustee can be the same person named as the guardian, or could be a different person.

TESTAMENTARY TRUSTEE: ALTERNATE:

20 3. AGE OF DISTRIBUTION. If you do establish a trust to allow a third party to manage assets for beneficiaries, then it is necessary for you to decide when the beneficiaries will be mature enough to manage assets on their own. You may want to give each beneficiary his/her share at the time the beneficiary reaches a particular age. I typically recommend 30 as the youngest age for outright distribution. You may consider splitting the distribution, such as ½ at age 25 and the balance at age 30, or 1/3 at 21, 1/3 at 25, and 1/3 at 35. You may use any age or combination of ages that you choose.

GENERAL QUESTIONS

NOTES AND QUESTIONS: Please note anything else which may be of importance in planning your estate, or note and questions you may have.

21 the Shevy Law Firm, llc

Telephone: 518-456-6705 Facsimile: 518-456-6709

WHAT IS ESTATE PLANNING?

Estate Planning is a very simple concept. Unfortunately, it is also the subject of many and misinterpretations. This confusion causes many to create an improper estate plan. To avoid this result, we need to take the time to understand what estate planning is. The following provides an explanation of the estate planning process so that you may be familiar with the topics we will discuss at our initial meeting. Please review this memo and complete the estate planning worksheet prior to our meeting.

Options to consider when planning your estate include:

1. Intestate Succession: The State of New York determines how your assets are distributed after your death. 2. Last : You decide how your assets are distributed after your death by a Will. Your Will is supervised by a court after your death. 3. Revocable or Living Trust: You decide where your assets are distributed using a trust that you can easily change without the consent of any other person. If properly implemented, court supervision after death is not required. 4. Irrevocable Trust: You decide to protect your assets from long term care (nursing home) expenses and decide how your assets are distributed after your death. These trusts can be drafted to allow for changes with the consent of another person.

There are times when both a Will and a trust (revocable or irrevocable) are recommended. If estate tax minimization or long term care planning is included in your goals, we can discuss the strategies to meet these goals after reviewing your personal circumstances.

INTESTATE SUCCESSION.

Intestate Succession is an estate plan by default. If you fail to personally create an estate plan prior to death, then the State of New York will determine to whom your estate will be transferred. In many intestate situations, the heirs as determined by the state are not the persons to whom you would have left the property. The current law provides that if:

1. You have a spouse and children: The spouse receives $50,000 plus one-half of the balance of your assets. The children equally share the other one-half. 2. You have a spouse and no children: The spouse takes everything. 3. You have children and no spouse: The children equally share everything. If a child predeceases you, his or her children may inherit. 4. You have parents and no spouse or children: The parents share everything. 5. No parents, spouse or children: Distribution depends upon who the closest living blood relatives may be.

22

THE LAST WILL AND TESTAMENT AND PROBATE.

New York State has very specific requirements with respect to the proper execution of a Will. To be validly executed Will, you must declared the document to be your Will in the presence of 2 independent witnesses. A Will can only be successively contested if: (1) the Will is not executed properly, (2) you do not have mental to execute a Will, or (3) there is or duress. When executed in an attorney’s office, you can be assured that your Will will be executed properly, and that the attorney will take every precaution to avoid contest.

Probate is the administration of your estate by the Surrogate Court according to the terms of your Will; or if there is no Will, then by intestate succession. The word “probate” usually conjures up visions of dark court buildings and substantial legal fees. This fear is generally based on horror stories passed down through the years. Most of the stories are either untrue or are based on misunderstandings as to the actual process.

Actual probate of the Will is fairly simple. The people who would inherit from you if you die without a Will are given a copy of your Will, and the opportunity to either sign a Waiver consenting to the terms of the Will, or a date and time to voice their objection to the probate of your Will before the applicable Court.

The Will also places little or no burden upon you during your lifetime. You do not need to change the title to any of your accounts or other investments. You can change your Will whenever you like provided that you are mentally competent.

REVOCABLE OR “LIVING” TRUSTS.

In order to fully understand the concepts behind a “living” trust, it is important for you to understand the difference between the three basic types of trusts. Today, when the term "trust" is used, it is likely being used in reference to what is known as a "living trust." The second broad category is a testamentary trust. A living trust is created by you during your lifetime. In most cases the living trust is revocable, which means that you may terminate or modify it. A testamentary trust, on the other hand, is created by your Will upon your death. A third type of trust is an “irrevocable trust,” commonly referred to as a “Medicaid Trust.” Medicaid Trusts are particularly useful if you wish to plan to protect your assets from the potential costs associated with nursing home care.

Creation of a living trust entails a two-step process. The first step is the execution of the physical document which will be referred to as a trust. The second and all-important step is the transfer of all the property out of your name as an individual and into the name of the trustee of the trust. The execution process is relatively simple. Where people go wrong with living trusts is with the next step: the transfer of assets to the trust. It is important to note that living trusts only avoid probate to the extent that the trust owns your assets (or your assets are controlled by joint ownership or beneficiary designation). If you own assets individually at the time of your death, probate will still be required.

The title to your home, bank accounts, stocks, life insurance, and all other major assets must be changed so that the records indicate a transfer has been made to the trust. When some people hear this requirement, they fear that somehow they will lose control and possession of their property. This fear is due to a misunderstanding of what occurs during the transfer process.

23 In short, as long as you are alive and able, the trust can be drafted so that no one can totally take away the management or control of your assets.

The major advantage of the living trust is the elimination of most types of court interference. If you become disabled, the living trust avoids the of having the court appoint a guardian to administer your financial affairs. If you die, the living trust avoids the necessity of probating your estate.

The primary disadvantage of the living trust, unfortunately, is the establishment cost. Because of the additional time it takes to explain the inner-workings of the trust, and then to create it, the out-of-pocket cost to you is many times greater than the cost of a Will. The second disadvantage of a living trust is the factor. After the trust is created, you must be willing to incur the inconvenience of transferring assets to your trust. You must also be willing to accept responsibility of maintaining the trust for the remainder of your life, including the proper transfer of any assets purchased after the creation of the trust. In short, you must be willing to place a bigger burden on yourself in order to lessen the burden on your heirs at the time of death. The third disadvantage of a living trust is the possibility of mismanagement by the successor trustee. By removing the court from the administrative process, the risk of mismanagement of the estate is increased. This disadvantage is eliminated or reduced by proper selection of the individual who will serve as trustee or successor trustee. If one trustworthy person cannot be found, then two persons can be named to serve as co-trustees. If no individuals can be found, then the trust department of a bank or other institution may be called upon to serve as the successor trustee. Finally, living trusts do nothing for long term care planning (planning for Medicaid eligibility).

LONG TERM CARE OR MEDICAID PLANNING

Long term care planning, also called Medicaid planning, involves the protection of assets from potential nursing home expenses. The best time to consider Medicaid planning is at least 5 years prior to nursing home admission. While no one has a crystal ball to make the 5 year determination, we typically assist clients in their late 60s or early 70s with long term care planning through the use of irrevocable trusts. Irrevocable trusts are never truly irrevocable, as New York law allows an irrevocable trust to be changed or terminated with the written consent of those beneficially interested in the trust (the creator of the trust and the beneficiaries).

Crisis planning is also available when a person has not adequately planned more than 5 years prior to a nursing home admission. Even after a person has been admitted to a nursing home, there is a strategy that allows us to save approximately ½ of a person’s assets from the nursing home cost. This strategy can only be implemented after a nursing home admission; and takes into consideration the private pay rate of the facility, the person’s fixed income (Social Security, and retirement account required minimum distributions), as well as any gifts made within the 5 prior years.

COMPREHENSIVE ESTATE PLAN

In addition to the selection of either a Will or living trust, a comprehensive estate plan should include a Health Care Proxy and Living Will (sometimes within the same document) and a durable general Power of Attorney.

24 The Health Care Proxy and Living Will address the termination of life support in the event of a or injury, and who will make health care decisions for you, if you cannot. By executing a Living Will you can inform your family and the attending physician of your desire not to receive life support or to have heroic measures taken to prolong your life. Or it can be used to clearly state your desire as to the medical care to be provided. That is, you may want measures taken to prolong your life. A Living Will is basically a health care declaration. The Health Care Proxy appoints an agent to speak for you. It is designed to entrust a loved one or close friend with the legal authority necessary to make medical decisions (including termination of life support) in case you are unable to personally communicate with the doctors.

By executing a Power of Attorney, you may grant to someone the legal authority to handle your financial transactions (pay your bills, manage your finances, and sometimes, plan for Medicaid eligibility). A Power of Attorney is only valid during your lifetime. If you die, the Power of Attorney automatically terminates. The Power of Attorney is intended to serve as a safety net to the estate plan to protect against lifetime financial emergencies. A Power of Attorney can postpone or possibly avoid a guardianship if you become mentally incapacitated.

ESTATE TAX PLANNING

The federal estate and gift tax exemption (the amount a person could pass without paying federal estate and gift tax) is $5 Million per person indexed for inflation ($5.49 Million in 2017). In addition to the $5.49 Million estate and gift tax exemption, each person may gift up to $14,000 annually to as many recipients as he or she chooses without even filing a gift tax return. New York States does not have a gift tax, but does have an estate tax that brings back gifts made within 3 years prior to death as part of the estate tax calculation.

The New York State estate tax exemption increases annually as follows:

April 1, 2017 – March 31, 2019 $5,250,000 April 1, 2019 and forward Equal to Federal Exemption

Under the federal rules, “portability” permits spouses to use each other’s exemptions, meaning that a married couple can fully utilize the full $10.99 Million of federal exemption. New York does not recognize portability, so planning must be implemented for each spouse to use both spouses’ New York exemptions. Additionally, New York’s estate requires estates valued at 105% of the exemption to lose the exemption in its entirety with New York estate tax calculated on the full value of the estate (essentially meaning there is no state estate tax exemption for these estates).

Please complete the enclosed estate planning worksheet prior to our meeting. It will provide me with the necessary information to provide the right recommendations to meet your estate planning goals. I look forward to meeting with you.

25

TRUST AGREEMENT FOR THE GRANTOR R. SMITH REVOCABLE TRUST1

I, GRANTOR R. SMITH, of Anytown, New York, hereby make this Agreement as Grantor and Trustee, [said Agreement to be effective when signed by me] [together with SPOUSE E. SMITH, of Anytown, New York, as Trustee, to be effective when signed by both of us].2

I have delivered or will deliver certain property to the Trustee, and the Trustee has [Trustees have]3 agreed to hold this property, together with any additional property contributed to the trust by me or by any other person, (the “Trust Estate”), upon the following terms:

ARTICLE I.

During My Lifetime4

1 This is a simple sample Revocable Trust form. Practical comments are italicized for you, and should not be shared with clients. Optional provisions are included in brackets. Before using any part of this form, be sure that you understand your client’s estate planning goals, and meet the specific facts for that client- for example, if the client does not have children, be sure that all language is appropriate. Explanatory footnotes are included throughout the draft. We typically send the draft Trust with the explanatory footnotes to the client for review (this footnotes within this form that are not italicized). Before the Trust is finalized and executed, be sure to remove all footnotes, and cleanly insert page-breaks where appropriate. 2 The Revocable Trust is essentially your alter ego. Once assets are transferred to the Trust, you will control the assets as Trustee, instead of controlling them in your individual capacity. You will report the trust income on your personal income tax return using your Social Security number. It is important to remember that the Revocable Trust only avoids probate to the extent that your Trust owns all of your assets unless the asset is controlled by joint ownership or beneficiary designation. 3 Be sure that if you have more than 1 Trustee that you change to Trustees throughout the document and use the proper tense/possessives. 4 During your lifetime, you control the trust and how the trust income (interest and dividends) and principal (underlying trust assets) is distributed. You may alter or amend the trust at any time. You may also revoke the trust.

26 Section 1.01 Disbursement of Income5

A. The net income of the trust will be paid to me, or accumulated or paid as I may direct from time to time.

B. In the event of, and during the continuance of the incompetence or other disability of mine, the Trustee may pay income of the trust in any one or more of the following ways, as the Trustee deems best: (1) directly to me; (2) to my committee, conservator or guardian; (3) to any of my [spouse and] children for my support, maintenance and welfare; or (4) by the Trustee using such income directly for my support, maintenance and welfare.

C. Any income not paid shall be accumulated and added to principal at least annually.

Section 1.02 Disbursement of Principal6

A. The Trustee may distribute any part or all of the trust principal to me for my health, support in reasonable comfort, or maintenance in the manner to which I am accustomed. [The Trustee may distribute any part or all of the trust principal to me as I may direct; or in the Trustee’s sole and absolute discretion.]

B. In the event of, and during the continuance of the incompetence or other disability of mine, the Trustee may pay principal of the trust in any one or more of the following ways, as the Trustee deems best: (1) directly to me; (2) to my committee, conservator or guardian; (3) to any of my [spouse and] children for my support, maintenance and welfare; or (4) by the Trustee using such principal directly for my support, maintenance and welfare.7

5 Remember that income generally means interest, dividends and rent. Capital gains can be redefined as income if the Trustee is given authority to so classify it as income. 6 If there comes a time when you can no longer act as Trustee, the successor/remaining Trustee can make sure that the trust principal is used to maintain your health and support (pay your daily living expenses). 7 If you become disabled, the Trustee may pay your expenses from trust principal for your benefit without making payment directly to you.

27 Section 1.03 Specific Rights Reserved to Me8

A. Right to Amend. I reserve the right, at any time and from time to time, to amend this Agreement, in whole or in part with the consent of the Trustee, by a written instrument executed and acknowledged by me and the Trustee.9

B. Right to Revoke. I reserve the right to revoke and terminate the trust created under this Agreement by delivering to the Trustee a written instrument executed and acknowledged solely by me.

C. Right to Withdraw or Appoint Principal. I reserve the right to appoint any part or all of the principal of the Trust Estate to any one or more persons (including myself) by delivering to the Trustee a written instrument executed and acknowledged solely by me or by my expressly and duly authorized attorney-in-fact.

D. 10Right to Add Other Assets. I reserve the right, at any time and from time to time, to transfer to the Trustee, by gift with the consent of the Trustee, or by Will or beneficiary designation, additional property, including life insurance policies, as I may desire. Any additional property will be held on the same terms as are then applicable to the original Trust Estate, except that it may be transferred subject to conditions and provisions of special application to additional property.

E. 11Right to Add or Remove Trustee. I reserve the right, at any time and from time to time, to add one or more Trustees or to remove any Trustee by a duly

8 This Section reserves certain rights to you. During your lifetime, you can change or terminate the trust at any time. However, if you do revoke the trust, the assets will then be subject to probate. 9 When drafting this section, consider which, if any, powers an agent under power off attorney should be given- perhaps give the agent the power to make administrative changes, but not to change the ultimate disposition (beneficiaries after the grantor’s death). 10 This permits you to add assets to the trust at any time during your life. 11 This permits you to add, change or remove a Trustee.

28 acknowledged written instrument filed with the Trust records. The effective date of the appointment of an additional Trustee is the date of the additional Trustee’s written consent to act.

ARTICLE II.

After My Death

Section 2.01 12Payment of My Debts, Taxes and Expenses13

A. Upon my death, the Trustee may directly pay and discharge, or disburse funds to my probate estate to pay and discharge (1) all or any part of my debts, (2) all or any part of the expenses incident to my last illness, and , and (3) all or any part of the administration expenses of my probate estate, including executors’ commissions, attorneys’ fees and all other proper administration expenses that are not paid or discharged by my probate estate, all as the Trustee may determine.

B. In addition, the Trustee may pay directly all administration expenses incurred with respect to the property passing under this Agreement and all inheritance, estate, transfer, succession and other death taxes (including any interest or penalties) payable by reason of my death with respect to the property passing under this Agreement and any property not passing under this Agreement.

Section 2.02 Disposition to Descendants14

12 When drafting the provisions with respect to payment of expenses and taxes, take into consideration how to allocate estate tax (should the tax be paid from only trust assets or should taxes be allocated among all assets- trust and otherwise). If the beneficiaries of the trust are different than the beneficiaries of a life insurance policy or retirement account, be sure to discuss with the client the funding of estate tax- should such a beneficiary be required to pay his or her share of tax? 13 This Section provides for the payment of debts, administration expenses and taxes. The federal estate tax exemption (the amount a person can pass without paying federal estate tax) is $5.49 Million, indexing annually with inflation. Spouses may share federal estate tax exemptions, regardless of how assets are titled. The New York State estate tax exemption is currently $5.25 Million and increases through 2019 when it will match the federal exemption. Remember, there is no portability for New York State estate tax purposes (spouses do not get to share state estate tax exemption).

29 Upon my death, the balance of the Trust Estate, after any payment under Section 2.1 has been made or set aside, will be distributed, subject to Section 2.03, to [my spouse; or if my spouse does not survive me, to] my descendants who survive me, per stirpes.

Section 2.03 Trusts for Descendants

Any property (other than tangible personal property) that would otherwise pass outright under this Agreement (other than pursuant to the exercise of a discretionary fiduciary power or ) to a descendant of mine15 who has not attained the age of [Age], shall instead be held by the Trustee as a separate trust for such descendant (the “Beneficiary”) upon the following terms:16

A. The Trustee may distribute to the Beneficiary any part or all of the income and principal of the trust as the Trustee may determine for health, support, maintenance or education. Any income not paid shall be accumulated and added at least annually to principal.17

B. The Trustee shall distribute the remaining principal of the trust to the Beneficiary upon the Beneficiary’s attaining the age of [Age].18

14 After your death, the remaining trust assets will be distributed to your descendants on a “per stirpes” basis. “Per stirpes” is a legal term that means the descendants of a predeceased beneficiary equally share their parent’s inheritance. For example, if [Child] predeceases you, [Child]’s ____ children will equally share [Child]’s 1/___ interest in your trust. 15 Do not rely exclusively on forms. This language should be crafted to ensure that the trusts are established for beneficiaries other than descendants. For example, if the trusts are for the client’s step-children/grandchildren, the language should include “to a descendant of mine or a descendant of my spouse.” Trusts for nieces/nephews could read, “to a descendant of my parents.” When you make these changes, be sure to also change the corresponding language in paragraph C below. 16 This establishes separate trusts for any Beneficiary under the age of [Age]. This keeps a Beneficiary’s inheritance in the control of another adult until such time as the Beneficiary may achieve an age of maturity. 17 Income (interest and dividends) and principal (underlying trust assets) may be sprinkled among the Beneficiary and his or her descendants for health, support or educational needs.

30 C. If the Beneficiary dies prior to attaining the age of [Age], then upon the Beneficiary’s death the remaining principal of the trust shall be distributed, subject to this Section, in equal shares to the Beneficiary’s then surviving children; or if there is none, to the then surviving descendants, per stirpes, of the person who, among a class consisting of me and my descendants, is the Beneficiary’s closest ancestor with any then surviving descendant.19

D. Notwithstanding anything under this Agreement, any trust created under this Agreement for any person not in being at the date of my death terminates (unless terminated earlier) 21 years after the death of the last to survive of all descendants of my parents and my spouse’s parents in being at that date, and upon termination the assets of the trust must be distributed to the person.20

ARTICLE III.

Trust Administration21

Section 3.01 Application of Property for Beneficiary22

Any property, whether principal or income, distributable to any person under this Agreement, may be applied for the benefit of that person, including, without limitation, a distribution to a trust for the benefit of that person. In the case of a minor, this property may be paid or delivered directly to the minor, to a parent or guardian of the minor, to a person with whom the minor resides, or to a custodian for the minor under any Uniform Transfers to Minors

18 The balance of the trust will be distributed to the Beneficiary when he or she attains the age of [Age]. 19 If the Beneficiary dies before the age of [Age], the Beneficiary’s children will inherit the balance of the trust. If the Beneficiary does not have children, the Beneficiary’s siblings will share the balance equally. 20 This protects the trusts from violating the Rule Against Perpetuities—a rule that does not permit trusts to last forever. 21 This Article provides standard terms with respect to the administration of the trusts established under this Revocable Trust. 22 Rather than making distributions to a beneficiary, the Trustee can write checks directly to the vendor on behalf of the beneficiary.

31 Act or similar until age 21 or an earlier age that is the maximum permitted under applicable law.23

Section 3.02 Exercise of Discretionary Powers

A. In connection with the exercise of a discretionary power to distribute income or principal to any person, there is no requirement to take into account the person’s other income or capital resources, the interest of the person in any other fund or the duty of anyone to support the person, although these factors may be taken into account. Notwithstanding the above, no distribution may be made to satisfy any legal obligation of any Trustee.24

B. Notwithstanding anything in this Agreement, no Trustee (other than me) may participate in a decision to make any proposed discretionary distribution of income or principal to himself or herself or to satisfy any legal obligation of the Trustee.25

Section 3.03 Discretionary Payments

Any discretionary payment from any trust under this Agreement may be charged only against the trust as a whole, and not against the individual share of any person at any time.

Section 3.04 Provision26

No beneficiary of any trust under this Agreement has any right or power to anticipate, pledge, assign, sell, transfer, alienate or encumber his or her interest in the trust in any way; nor is any interest in any manner liable for or subject to the debts, liabilities or obligations of any beneficiary or claims of any sort against a beneficiary.

23 If a minor’s inheritance is too small to justify establishing a trust, the Executor or Trustee can distribute the inheritance directly to the minor, the minor’s parent or guardian, or to a custodial account for the minor. 24 The Trustee may, but is not required, to review a beneficiary’s income or other assets before making a distribution from the trust. 25 A Trustee cannot distribute trust assets to himself or herself or to satisfy the Trustee’s legal obligations (i.e. child support). This is necessary to provide for creditor protection. 26 This protects trust assets from a beneficiary’s creditors.

32 Section 3.05 Limitation on Distributions27

Notwithstanding anything in this Agreement, no discretionary distribution of income or principal of any trust under this Agreement may be applied to pay for medical care, residential facilities, or any other care or service that would otherwise be provided for any beneficiary of any trust under this Agreement by any federal, state, or other governmental agency; and no discretionary distribution of income or principal may be made for reimbursement for any care, facilities or services previously provided. Before making any discretionary payment to or for the benefit of a beneficiary of any trust under this Agreement, the Trustee must consider the amounts the beneficiary is receiving or may be entitled to receive from any governmental agency for care, facilities, or services. If any amount is available, discretionary distributions of income and principal from any trust under this Agreement may be made only to supplement this amount, and to provide liberally for needs and comforts over and above the basic maintenance, support, and medical care that may be paid for by any agency.

Section 3.06 of Authority28

At any time when more than one Trustee is acting, by a written instrument signed by all of the Trustees acting with respect to any trust under this Agreement, the Trustees may (1) authorize any one or more Trustees (jointly or severally as the instrument specifies) to write checks and otherwise direct the transfer, deposit, investment or disbursement of funds or other assets of the trust, and (2) delegate to any one or more Trustees entire authority to make decisions regarding the investment and reinvestment of the assets of the trust. In addition, the Trustees (or any Trustee to whom this authority is delegated as provided above) may in the same manner delegate to agents (including independent investment advisers, investment or managers, banks or trust , and regulated investment companies) the authority to make those decisions or take those actions. Any delegation is revocable by any Trustee upon written notice to all Trustees and, if applicable, to any agent. To the extent applicable law allows, no

27 This protects trust assets from a beneficiary’s medical expenses that can be covered by a government program, such as Medicaid. 28 This permits the Trustees to delegate check-writing or investment-making authority to one Trustee.

33 Trustee is liable for any claim or loss resulting from investments made or held during a period during which, pursuant to this Section, the Trustee had delegated his or her investment duties.

ARTICLE IV.

Powers of Trustee

Section 4.01 Broad Powers29

In addition to the powers conferred by law, the Trustee has complete discretion to exercise each of the following powers with respect to any property held at any time under this Agreement without authorization from any court, it being my intent that these powers be construed in the broadest possible manner:

A. To retain, for a period that the Trustee may determine, any property, real or personal, constituting a part of the Trust Estate, to carry on any business in which any trust has an interest, and to invest and reinvest in any real or personal property, all as the Trustee may determine, without regard to any requirement for diversification;

B. To sell, grant options with respect to, or dispose of, any property, real or personal, for cash or on credit, with or without security, upon the terms that the Trustee may determine;

C. To lease any property, real or personal, for any period, upon the terms (including options for renewal) that the Trustee may determine, and to improve or take any other action with respect to real property;

D. To permit any income beneficiary (and the guardian of any minor income beneficiary and the family of such guardian) to use any real property or tangible personal property held hereunder for the benefit of such beneficiary, rent free or otherwise, upon such terms as my Executor or the Trustee (other than such beneficiary or guardian) may determine;

29 This Article grants specific powers to the Trustee. These are broad powers designed to ensure maximum flexibility.

34 E. To borrow money for any purpose, from others or from any Trustee, with or without security, and to mortgage or pledge any property, real or personal;

F. To employ agents, brokers, attorneys, accountants, custodians and investment advisers, (including any individual Trustee) and to treat their compensation as an administration expense;

G. To purchase any real or personal property from my estate, to make loans to my estate or to any trust at prevailing interest rates, and to sell any real or personal property from one trust to another;

H. To sell any property, real or personal, from my estate to any trust or from any trust to my estate, or from one trust to another;

I. To sell any property, real or personal, to any Executor, Trustee or beneficiary hereunder at fair market value;

J. To make loans to any income beneficiary after my death, interest free or otherwise, upon the terms that the Trustee (other than such beneficiary) may determine;

K. To sever any trust into two or more separate trusts having the same terms as the original trust, and to combine two or more trusts having identical terms and beneficiaries (whether or not the trusts resulted from division of a prior trust), at any time and from time to time (whether before or after funding), without approval of any court, for administrative, tax or any other purpose determined by the Trustee to be in the best interests of any beneficiary (including any remainder beneficiary);30

L. To hold the property of any separate trusts under this Agreement as an undivided whole; provided that these separate trusts must have undivided interests; and provided further that no holding may defer the of any estate in possession or otherwise;

30 Sections K through N give the Trustee the power to make different tax elections for the trusts.

35 M. To allocate administration expenses to income or principal in the proportions that my Executor or the Trustee may determine, to the extent this discretion is permitted under applicable law, without liability to any person for any consequences of this allocation;

N. To treat capital gains on the books, records and tax returns of any trust as part of a distribution to a beneficiary of the trust to the extent of principal distributed to the beneficiary;

O. To take control of, conduct, continue or terminate any of my or the trust’s digital accounts on any social networking website, any micro-blogging or message service website or any e-mail website, including, but not limited to, broker accounts, utility accounts, Credit Union and bank accounts, other financial institutions and similar digital accounts related to personal, financial, photographs, medical, tax and real estate, customer affinity programs, and any file storage sites;

P. To change the situs or governing law of any trust under this Agreement at any time and from time to time for the convenience of the beneficiaries or the Trustee or for any other reason; and31

Q. To make any distribution or division of property wholly or partly in kind, whether or not pro rata, using specific assets or undivided interests therein.32

31 A change in situs means a change in location or jurisdiction. For example, if a beneficiary moves to a state where there is no state income tax, the trust can also be moved to that state. 32 A distribution “in kind” means that the Trustee can distribute an investment directly to a beneficiary. For example, if the trust owns 10 shares of stock in a corporation, the Trustee can distribute the 10 shares directly to the beneficiary rather than liquidating the shares and distributing the cash.

36 ARTICLE V.

Provisions Concerning Trustee33

Section 5.01 Successor and Additional Trustee34

A. If I fail to continue to act as Trustee or upon my death, I appoint my , , to be successor Trustee.35

B. I appoint ______, of ______, New York, to be the Trustee of any Trust established under Section 2.03 of this Agreement. If s/he fails to qualify or to continue to act, I appoint ______, of ______, New York, to be substitute Trustee.

C. To the extent that the exercise of this right does not conflict with the foregoing, each Trustee acting under this Agreement has the right to designate an individual to act as a successor Trustee in the event he or she fails to continue to act, provided that no conflicting designation by a previously acting Trustee is in effect.

Section 5.02 Designation and Appointment of Additional and Successor Trustee

A. Any designation made under this Agreement to provide for a series of individuals to act as a successor Trustee, must be made by a duly acknowledged instrument filed with the Trust records, and is revocable with respect to any designated successor by the designating individual at any time before the successor is appointed.

B. The appointment of an additional or successor Trustee becomes effective upon the filing with the trust records of the additional or successor Trustee’s written consent to act.

33 This Article concerns the appointment of a Trustee and includes specific provisions with respect to the payment of Trustee commissions, the removal or resignation of a Trustee and the appointment of a successor Trustee. 34 This provides for the appointment of an additional and a successor Trustee.

35 Be sure to discuss with the grantor/client the appointment of successor Trustees. Do not only consider the appointment of a Trustee after the death of the grantor/client, but also in the event of incapacity. Remember to coordinate the appointment of Trustees with the possible additional powers granted to an agent under a power of attorney.

37 Section 5.03 Elimination of Bond

No bond or other security is required of any Trustee acting under this Agreement in any jurisdiction.

Section 5.04 Resignation of Trustee36

Any Trustee may resign by filing a written notice of resignation with the trust records. In addition, any Trustee is deemed to have resigned if there is filed with the trust records a certification in writing from any attending physician of the Trustee that he or she is no longer able to make decisions with respect to financial matters.

Section 5.05 Compensation of Trustee37 I anticipate that the Trustee may contract for professional investment management of trusts hereunder. Because this delegation will reduce the scope of the Trustee’s duties and liabilities, the Trustee’s compensation should be correspondingly reduced. To this end, with respect to each trust:

A. No Trustee who is also a beneficiary of such trust is entitled to compensation for acting as Trustee.

B. Any Independent Trustee shall receive such compensation for his, her or its services as shall be agreed from time to time with the other Trustees acting with respect to such trust, or if there is none, with a majority of the adult income beneficiaries of such trust, or if there is none (or if a majority cannot agree), with a majority of all Trustees (other than Independent Trustees) acting under this Agreement. The preceding sentence shall not be deemed to preclude any professional organization with which any individual Trustee may be associated from receiving its normal fees for services performed for any trust hereunder; provided that no

36 This provides for the resignation of a Trustee. Additionally, if a Trustee becomes incapacitated, the Trustee can be deemed to have resigned. 37 This provides for Trustee compensation. A Trustee who is also a beneficiary will not be compensated for acting as Trustee of his or her own trust.

38 fees shall be payable for work for which the Trustee is otherwise compensated in a fiduciary capacity.

C. Any Trustee may be reimbursed for such Trustee’s reasonable expenses in acting hereunder.

Section 5.06 Liability of Trustee No additional or successor Trustee is personally liable for any act or of any predecessor. With the written consent of all adult beneficiaries (including presumptive remainder beneficiaries, but excluding contingent remainder beneficiaries), an additional or successor Trustee may accept the account rendered and the property received as a full and complete discharge to a predecessor Trustee without incurring any liability for so doing.

ARTICLE VI.

Miscellaneous Provisions

Section 6.01 Representation of Person Under a Disability Where a party to any proceeding with respect to any trust has the same interest as a person under a disability, it is not necessary to serve legal process on the person under a disability.

Section 6.02 Law Governing

The trust hereby created is in all respects be construed under the internal laws of the State of New York. Each trust hereby created is in all respects be regulated by the laws of the State in which the trust is situated. In the event that the situs of any trust cannot be determined with certainty, the laws of the State of New York apply.

Section 6.03 Termination of Trusts If at any time an Independent Trustee determines that it is uneconomic to continue any trust, that Trustee may terminate the trust and distribute the trust assets, in amounts and

39

proportions determined by that Trustee, to the person or persons to whom income may be distributed.38

Section 6.04 Consolidation of Trusts

If at any time after my death, there is in existence a trust under my Will or under any Trust Agreement made by me as Grantor, having identical beneficiaries and substantially the same terms as any trust under this Agreement, the Trustee may terminate the trust hereunder, and transfer all assets thereof to the trustee of such other trust, to be administered by the trustee thereof or may receive the assets of such other trust and administer them hereunder. Different termination dates under the applicable Rule Against Perpetuities shall not be deemed a difference in the terms of such trusts, but the portion of the trust representing the transferred assets shall retain the termination date of the original trust.

Section 6.05 Definitions

As used in this Agreement:

A. The term “Trustee” means the Trustee or Trustees acting under this Agreement from time to time.

B. The term “Independent Trustee” means a Trustee other than: (i) a beneficiary (including a remainderman) of such trust, (ii) any person having a legal duty to support a beneficiary of such trust, and (iii) any person who would be considered “related or subordinate” to a beneficiary or a person having such duty of support (within the meaning of Section 672(c) of the Code).

C. References to Sections of the Code are to the Internal Revenue Code of 1986, as amended, and shall be deemed to refer to the corresponding sections of subsequent federal tax law.

38 If an Independent Trustee determines that it is no longer economic to continue the trust (i.e. funds have been spent down), the Trustee can dissolve the trust and distribute the balance to the Beneficiary.

40 CONCLUSION

I have duly executed this Trust Agreement on the date set opposite my signature.

Dated: ______, 20______GRANTOR R. SMITH, Grantor and Trustee

Dated: ______, 20______SPOUSE E. SMITH, Trustee

STATE OF NEW YORK, COUNTY OF ) ss.

On the _____ day of ______, in the year 20__, before me, the undersigned, a notary public in and for said state, personally appeared GRANTOR R. SMITH, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity as Grantor and Trustee, and that by his/her signature on the instrument, he/she executed the instrument.

______Notary Public

STATE OF NEW YORK, COUNTY OF ) ss.

On the _____ day of ______, in the year 20__, before me, the undersigned, a notary public in and for said state, personally appeared SPOUSE E. SMITH, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity as Trustee, and that by his/her signature on the instrument, he/she executed the instrument.

______Notary Public

41

42

43

44

TRUST OVERVIEW

Patricia J. Shevy, Esq. The Shevy Law Firm, LLC 518-456-6705

45 What is a Trust?

 A Trust is a written, formal agreement between: – The Grantor (settlor, creator)- the person who makes the contribution to the Trust. – The Trustee- the person who takes over control of the Trust. – The Beneficiary- the person who is going to receive benefits (income and/or principal from the Trust).

46 Major Law Governing Trusts

 Surrogate’s Court Procedure Act – See definitions in materials.  Estates Powers and Trusts Law – Article 7- General Trust Provisions – Article 11- Fiduciary Duties and Responsibilities – Article 11-A- Principal and Income Act

47 Article 7: General Trust Provisions

 EPTL §7-1.14: Any person (a natural person, an association, board, any corporation, court, governmental agency, authority or subdivisions, partnership or other firm and the state under EPTL §1-2.12) may by lifetime trust dispose of real and personal property. A natural person must be at least age 18.  EPTL §7-1.16: A lifetime trust is irrevocable unless it expressly provides that it is revocable.

48 Article 7: General Trust Provisions

 EPTL §7-1.17(a): A lifetime trust shall be in writing and executed and acknowledged by the grantor and at least one trustee (who may be grantor) in the manner required for the recording of a deed; or in lieu of acknowledgement, 2 witnesses.  EPTL §7-1.18: A lifetime trust is valid as to any assets therein to the extent the assets have been transferred to the trust.  EPTL §7-1.19(a): Any trustee or beneficiary may petition to terminate an uneconomical trust.

49 What kinds of trusts exist?

 Testamentary Trusts– established under your Will or other Lifetime Trusts – Trusts for Minor Children/Grandchildren – Trusts for  Revocable Trusts  Irrevocable Trusts– lots of kinds – Medicaid Trusts – Insurance Trusts – Pet Trusts

50 Questions to Ask . . .

 Purpose of the Gift  Level on Control  When Distribution is Required  Tax Consequences: – Present or – Gift/Estate Tax – Income Tax

51 Tax Considerations

 Federal Gift and Estate Tax  NYS Estate Tax  Generation-Skipping Transfer Tax  Income Tax – Tax Cost Basis- Carry Over or Step Up?

52 Why do I care about estate taxes?

 New York State estate tax exemption- amount you can pass without paying NYS estate tax. – $5.25 Million 04/01/2017 – 03/31/2019. – Matches the federal exemption as of 04/01/2019. – No portability.  Federal estate tax exemption- amount you can pass without paying federal estate tax. – $5.49 Million and indexes with inflation. – Portability between spouses.

53 Outright Gifts

 Code §2503 allows an exclusion from taxable gifts for present interests given to each donee each year up to a specified amount.  Annual exclusion is currently $14,000 and applies only to present interests.  Future interest do not qualify for exclusion.

54 Outright Gifts

 Present Interest: an unrestrictive right to the immediate use, possession or enjoyment of property or the income from property. – Qualifies for annual exclusion.  Future Interest: reversions, remainders and other interests or estate, whether vested or contingent, which are limited to commence in use, possession or enjoyment at some future time. – Does not qualify for annual exclusion.

55 Revocable Trusts

56 Revocable Trust

 What is it? A revocable trust is an agreement established by a donor that acts as the donor’s “alter ego.” – The donor can amend, alter or revoke the agreement. – The donor can act as sole Trustee of the trust. – The donor is in full control.

57 Revocable Trusts

 Benefits of a Revocable Trust – Avoiding Probate – Maintaining Privacy – Avoiding ancillary probate – Avoiding Will contests – Quick disposition – Asset management

58 Revocable Trusts

 Avoiding Probate – Many misconceptions exist about the probate process. – Waivers of citation can make the process easier.

 Privacy – Private contract. – Pour-over Will may effect this.

59 Revocable Trusts

 No Ancillary Probate – Example … if the grantor’s primary residence is New York, but the grantor also owns a home in Florida, the grantor may transfer the Florida real estate to a New York Revocable Trust, thereby avoiding probate in both states.  Avoid Contests – More difficult to challenge agreements that were made during a person’s lifetime.

60 Revocable Trusts

 Quick Disposition – Can save months of time – Complexity of estate may alter this

 Asset Management – Grantor and Trustee – Control assets to meet goals.

61 Revocable Trusts

 Professional Management – Have an expert manage your assets

 Incapacity – Powers of Attorney are sometimes not honored by financial institutions (even when the law requires it!) – Revocable Trust may provide a Trustee greater flexibility, control and authority than a POA.

62 When to use a Revocable Trust

 Client owns real estate in a foreign jurisdiction  Client has a domestic partner – who the clients want to inherit his/her estate.  The client is involved in a non- traditional marriage (second marriage, no marriage).  Client wishes to keep something private.  Client may move to a state that is more complex.  Client may acquire vacation/retirement home in another state.

63 More Reasons to Use. . .

 You want to skip one or more generations.  You want to avoid the capital gain tax on assets that have a low basis.  You want to maximize gift making.  You want to divest yourself of life insurance (subject to federal estate tax) but wish to indirectly control the use of the policy's cash value and policy proceeds on death.

64 How to Draft a Revocable Trust.

I, GRANTOR R. SMITH, of Anytown, New York, hereby make this Agreement as Grantor and Trustee, [said Agreement to be effective when signed by me] [together with SPOUSE E. SMITH, of Anytown, New York, as Trustee, to be effective when signed by both of us]. I have delivered or will deliver certain property to the Trustee, and the Trustee has [Trustees have] agreed to hold this property, together with any additional property contributed to the trust by me or by any other person, (the “Trust Estate”), upon the following terms:

65 Provisions During Lifetime

 Disbursement of Income- who decides, who can receive, convert to principal if not taken.  Disbursement of Principal- who decides, who can receive.  Power to Amend/Revoke- Remember, trust is irrevocable unless specifically stated that it can be revoked; and by whom.

66 What happens after death?

 Payment of Taxes and Administration Expenses- are they allocated proportionally, paid from residue, . . . Remember to coordinate with beneficiary designations and joint ownership.  Cash Gifts/Other Gifts- Be specific, and clear in drafting. Remember to coordinate timing (“who survives me” versus “is then surviving.”

67 What happens after death?

 Residuary- how are the remaining assets distributed after death, outright or held in further trust.  Trusts for Young Beneficiaries- assets available for health, support, maintenance or education until a specified age (25 or 30 or forever).

68 Administrative Provisions

 Trustee’s powers to manage trust assets.  Appointment of Trustee and successors.  Discretionary distribution rules.  No bonding or insurance, minimal court involvement.  Accounting requirements.  Compensation.  Governing law.

69 Drafting Reminders. . . .

 Sample simple revocable trust in your materials.  Footnotes in italics are notes to you, the drafter. Normal footnotes are explanations for the client when reviewing a draft.  Remove the footnotes before the client signs.  Trust must be acknowledged or signed in the presence of 2 independent witnesses.

70 Irrevocable Trusts

 Inter vivos irrevocable trusts include the following: – Basic irrevocable trusts; – Crummey withdrawal or demand; – Generation-skipping and dynasty trusts; and – Specialized trusts, such as equipment leasing trusts, educational trusts, and incentive trusts.

71 What is a Grantor Trust?

 Grantor trusts are those trusts whose income is taxable to the grantor under Code Sections 671 through 679.  A Revocable Trust is a grantor trust because of its revocability by the grantor.  An irrevocable trust is a grantor trust if grantor has a reversionary interest in the trust assets or has retained certain powers (“strings”) over the trust.

72 Grantor Trust “Strings”

– Power to re-acquire trust property by substituting property of equivalent value-- IRC 674(4) – Income is distributed to Grantor or Grantor’s spouse or held/accumulated for future distribution to Grantor or Grantor’s spouse without the approval or consent of an adverse party– IRC 677(a) – Unrestricted power to remove or substitute Trustees and to designate any person as a replacement Trustee– IRC 1.674(d)-2 – Power to revoke under IRC 675 would not work for an irrevocable trust (generally defeats the purpose). 73 Tax Identification Number

 Revocable Trust- use the Grantor’s Social Security Number until death; then obtain TIN.  Irrevocable Trust- depends on the trust. Grantor trusts (Medicaid trusts) do not necessarily require a separate TIN. See materials/.  Go to IRS website, and complete online, but. . . You still need a signed SS-4.

74 Funding the Trust

 Revocable Trust- only avoids probate to the extent that the trust is funded. . . Assets are re- titled in the name of the Trust. – Real Estate- file deed with county clerk. – Bank accounts/Investments- change account with financial institutions. – Privately held businesses- of LLC membership interest or stock powers to the Trust.

75 Once in the trust, what is income? What is principal?

Interest and Income Dividends (Normal Investments) Capital Gains (Normal Principal Investments) Business Income Income (Generally Accepted Accounting Principles) Business Loss Principal Proceeds from Sale of Principal Business Assets (not inventory) Refunds Principal Fiduciary Fees Annual Commissions- 1/3 Income, 2/3 Principal; 1% principal commission 76 from Commission What else?

 Materials include: – Sample Simple Revocable Trust- includes testamentary trusts for young beneficiaries after Grantor’s death. – Estate Planning Memo- We send this to clients before the initial meeting. – Estate Planning Worksheet- We send this to clients before initial meeting, and request that it be completed prior to that meeting.

77 THE END.

Patricia J. Shevy, Esq. The Shevy Law Firm, LLC 518-456-6705

78

Sample Trusts

by

Elizabeth Forspan, Esq.

Ronald Fatoullah & Associates Great Neck

79 80 DISCLAIMER: This form is for educational purposes only and is only meant as a sample form, which should not be relied on as a complete trust. It is designed to be used as guidance for the attorney who should analyze each individual case before drafting each client’s trust. There are many variations that the attorney can use to meet the particular client’s needs. This sample form is not legal advice.

JANE DOE IRREVOCABLE TRUST

TRUST AGREEMENT, made this ____ day of December, 2016 by and between JANE

DOE, residing at ______(hereinafter referred to as the “Grantor”), and JOHN SMITH, residing at ______and JOE SMITH residing at ______(hereinafter referred to as the “Co-Trustee”).

W I T N E S S E T H:

WHEREAS, the Grantor desires to create a trust to hold such property itemized and described in “Exhibit A” attached hereto and made a part hereof, together with such monies, securities and other assets as the Trustee may hereafter at any time hold or acquire hereunder

(said monies, securities and other assets, being hereinafter referred to collectively as the “Trust

Estate”) for the purposes hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Grantor agrees to execute such further instruments as shall be necessary to transfer said property to the Trust and the Trustee agrees to hold the Trust Estate for the following uses and purposes and subject to the terms and conditions hereinafter set forth:

1

81

ARTICLE I. GENERAL PROVISIONS

(1) ADDITIONS TO CORPUS

The Grantor with written notice to the Trustee may add from time to time to the Trust

Estate any property by deed or Will or otherwise. The Grantor further grants to other persons the power to add additional to this Trust, subject to acceptance by the Trustee.

(2) LAWS GOVERNING

The Grantor is currently a resident of the State of New York, and all questions pertaining to the validity, construction, effect and administration of this Agreement shall be determined by and in accordance with the laws of New York State. This Agreement shall be construed and regulated in all respects by the laws of the State of New York.

(3) NAME OF TRUST

This Trust shall be known as the “JANE DOE IRREVOCABLE TRUST” and it shall be sufficient that it be referred to as such in any deed, assignment, bequest or devise.

(4) TRUST IRREVOCABLE

This Trust is hereby declared to be irrevocable and it shall not at any time, by any person or persons, including the Grantor, be amended, altered or modified in any manner.

(5) FAMILY MEMBERS

At the time of the execution of this Trust, Grantor's family consists of:

2

82 Grantor's spouse, [name of Grantor's spouse], herein sometimes referred to as “spouse.”

Grantor's children, [name of Grantor's child 1], [name of Grantor's child 2] and

[name of Grantor's child 3], herein sometimes referred to as “child” or “children.”

Whenever in this Trust the Grantor makes a disposition of property to persons described therein as a child, children, issue, descendants, or distributees or by any term of like import, the

Grantor does intend to include their adopted children or the issue of such adopted children.

ARTICLE II. DISPOSITION OF TRUST ESTATE DURING GRANTOR'S LIFETIME

The Trustee shall hold, manage, invest and reinvest the Trust Estate, and shall pay or apply the income and principal of the Trust Estate in the following manner:

(1) DISTRIBUTION OF INCOME AND PRINCIPAL

(a) INCOME DISTRIBUTIONS: The net income of the Trust shall be paid to or applied for the benefit of the Grantor during Grantor’s lifetime, in convenient installments, at least quarterly. Net income shall be strictly defined as interest income, dividends and rent.

(b) PRINCIPAL DISTRIBUTIONS: During the lifetime of the Grantor, the Trustee shall pay as much of the principal from the Trust Estate as the Trustee shall deem proper, in the

Trustee's sole and absolute discretion, to or for the benefit of Grantor's children or grandchildren. up to the entire amount of the trust corpus together with any accumulated income thereon

(including to the Trustee(s) themselves if they are a named remaindermen). In the event any remainder beneficiary’s interest is to be held in a continuing trust upon the death of the Grantor, the Trustee shall be governed by the standard for distributions contained in said continuing trust

3

83 to prevent this power from affecting said beneficiary’s right to obtain or maintain government benefits, or giving said beneficiary’s creditors any rights hereunder. A Trustee may only make a distribution to himself upon the consent of a co-trustee, or, in the event there is only one Trustee acting, upon the consent of a successor Trustee as a condition to the Trustee making any said distributions. This paragraph is expressly intended to negate the provisions of section

10-10.1 of Estate Powers and Trust Laws of the State of New York.

Any distributions made pursuant to the provisions herein shall be considered as advancements in determining the beneficiary's respective share as provided for hereinafter.

The Trustee shall have no right to invade principal of the Trust Estate for the benefit of the Grantor or Grantor's spouse. The Grantor directs that the provisions of Section 7-1.6 of the

Estates, Powers and of the State of New York, or any successor statute thereto, shall not be available to require any invasion of principal by the Trustee or any court.

(c) RESIDENTIAL REAL PROPERTY: In the event that this Trust holds residential real property (including or the shares of a apartment) used by the Grantor, then Grantor shall have the exclusive right to occupy and use the said real property (including a cooperative apartment) for residential purposes. The Grantor shall not be required to pay rent for such property, but shall be responsible for and required to pay all of the expenses of the maintenance of the property, including taxes, insurance, utilities, mortgage payments and normal costs of maintenance and upkeep of the property.

ARTICLE III. COORDINATION WITH THE ESTATE OF GRANTOR OR GRANTOR'S SPOUSE

Upon the death of the Grantor or Grantor's Spouse, the Trustee, in the Trustee's sole and absolute discretion, may pay directly or acquire by purchase, exchange or otherwise, certain

4

84 assets from either the estate of the Grantor or Grantor's spouse to provide said estate with cash to pay: (i) the funeral expenses of the Grantor or Grantor's spouse, (ii) any and all death taxes imposed upon the estate, (iii) court filing fees of a probate or administration proceeding and any and all legal and accounting fees related to the estate, and (iv) the amount, if any required to satisfy the cash bequests made in a Will by the Grantor or Grantor's spouse.

The Trustee shall have no duty to: (i) determine the accuracy or propriety of any amount or sum; (ii) see to the application of any sum paid, or other property delivered, to the Executor of the Grantor or the Grantor's spouse; or (iii) withhold distribution of any asset, except as may be limited by other paragraphs of this Trust.

ARTICLE IV. DISPOSITION OF TRUST ESTATE UPON DEATH OF GRANTOR

(1) DISTRIBUTION UNDER LIMITED POWER OF APPOINTMENT

The Grantor may appoint all or any portion of the principal and any accumulated and accrued income of this Trust to or among any one or more members of a class consisting of beneficiaries of the Grantor limited to Grantor’s children and/or grandchildren, whether presently living or born hereafter, in such proportions and amounts, without regard to equality, outright or in further trust, as the Grantor may direct and appoint by Grantor’s Last Will and Testament, submitted for probate within ninety (90) days of Grantor’s death, by specific reference hereto, or by a written acknowledged instrument executed by Grantor (or any person having a valid

Durable Power of Attorney for such Grantor) making specific reference to this power of appointment. No such appointment shall be made to Grantor, Grantor’s spouse, Grantor’s

5

85 creditors, the creditor of Grantor’s spouse, Grantor’s estate or the creditors of Grantor’s estate, the creditors of Grantor’s spouse, the estate of Grantor’s spouse or the creditors of Grantor’s spouse’s estate.

(2) DISTRIBUTION IN DEFAULT OF EXERCISE OF POWER OF APPOINTMENT

(a) DISPOSITION IN THE EVENT GRANTOR'S SPOUSE SURVIVES THE

GRANTOR: In the event that the Grantor has not exercised the limited power of appointment conferred upon the Grantor in Section (1) of this Article as to the Trust Estate and Grantor's spouse survives Grantor, then the Trustee shall maintain and distribute the Trust Estate, as follows:

(i) INCOME DISTRIBUTIONS: During the lifetime of the Grantor's spouse, the

Trustee, in the Trustee's sole discretion, shall pay the entire net income to or for the benefit of

Grantor's spouse annually in quarterly or more frequent installments.

(ii) PRINCIPAL DISTRIBUTIONS: During the lifetime of Grantor's spouse, the

Trustee, shall pay as much of the principal from the Trust Estate as the Trustee shall deem proper, in the Trustee's sole and absolute discretion, to or for the benefit of Grantor's children or grandchildren. up to the entire amount of the trust corpus together with any accumulated income thereon (including to the Trustee(s) themselves if they are a named remaindermen). A Trustee may only make a distribution to himself upon the consent of a co-trustee, or, in the event there is only one Trustee acting, upon the consent of a successor Trustee as a condition precedent to the

Trustee making any said distributions. This paragraph is expressly intended to negate the provisions of section 10-10.1 of Estate Powers and Trust Laws of the State of New York.

6

86 Any distributions made pursuant to the provisions herein shall be considered as advancements in determining the beneficiary's respective share as provided for hereinafter.

In no event shall the Trustee invade principal to or for the benefit of Grantor's spouse.

The Grantor directs that the provisions of Section 7-1.6 of the Estates, Powers and Trust Law of the State of New York, or any successor statute thereto, shall not be available to require any invasion of principal by the Trustees or any court.

(iii) Upon the demise of Grantor's spouse, the Trustee shall pay and distribute the balance of the Trust Estate to Grantor's children, per stirpes.

(b) DISPOSITION IN THE EVENT GRANTOR'S SPOUSE PREDECEASES THE

GRANTOR: In the event that the Grantor has not exercised the limited power of appointment conferred upon the Grantor in section (1) of this Article as to the Trust Estate, and further in the event Grantor's spouse predeceases the Grantor, then the Trustee shall pay and distribute the

Trust Estate to Grantor's children, per stirpes.

(3) CONTINGENCY TRUST PROVISIONS

(a) DISTRIBUTION TO CONTINGENT BENEFICIARIES: In the event that none of

Grantor's beneficiaries named hereunder survive to the time the Trust Estate is to vest, then, at the death of the last of them, the then remaining Trust Estate shall be distributed to Grantor's heirs at law under the laws of the State of New York.

(b) DISTRIBUTION TO BENEFICIARY UNDER AGE TWENTY FIVE: If any property comprising part of the Trust Estate shall be payable to a person under the age of twenty- five (25) years, the share of such beneficiary (being hereinafter referred to as “Beneficiary”) shall not be conveyed or distributed to Beneficiary but instead shall be given to the Trustee named under sub-paragraph (d) below and held by the Trustee, in trust, pursuant to the following 7

87 provisions:

(i) Trustee shall hold, manage, invest and reinvest each share set aside for

Beneficiary in a separate trust for the benefit of Beneficiary and shall pay

so much or all of the net income from such trust to or for the benefit of

Beneficiary thereof, for the health, education, maintenance and support of

Beneficiary, to such extent and at such time or times and in such manner

as may be determined in the sole discretion of Trustee. Any net income

not so paid shall be accumulated and added to principal at least annually

and thereafter shall be held, administered and disposed of as a part thereof.

(ii) Trustee may pay to or for the benefit of Beneficiary, for the health,

education, maintenance and support of Beneficiary, from the principal of

Beneficiary's trust, such amounts, including the whole thereof, as

determined by Trustee in his or her sole discretion.

(iii) When Beneficiary shall attain age of twenty-five (25) years, the trust for

Beneficiary shall terminate and any remaining principal and income shall

be paid and distributed to Beneficiary, discharged of trust. If Beneficiary

dies before said termination of trust, such principal and income shall be

paid and distributed to, or held in further trust for the benefit of, such one

or more persons, or other entities (other than Beneficiary,

creditors of Beneficiary, the estate of Beneficiary, or creditors of the estate

of Beneficiary), to such extent, in such amounts and proportions and in

such lawful interests or estates, whether absolute or in trust, as Beneficiary

may appoint by specific reference to this power of appointment in the Last

Will and Testament of Beneficiary, executed after attaining majority and

8

88 admitted to probate, or absent such appointment (or absent Trustee

receiving notice of the existence of such a Will within three months after

the death of Beneficiary), such principal and income shall be paid and dis-

tributed to any then living issue of such Beneficiary, in equal shares, per

stirpes, or if Beneficiary has no issue, to Grantor’s then living issue, in

equal shares, per stirpes. If Grantor has no living issue at such time, the

same shall be paid and distributed to those who would take from Grantor

as if Grantor were then to die without a will, unmarried and the absolute

owner of the same, and a resident of the State of New York.

(iv) JOHN SMITH is hereby appointed Trustee of the Trust for the Beneficiary.

If for any reason, JOHN SMITH is unable or unwilling to serve as

Trustee, JOE SMITH shall serve as successor Trustee.

ARTICLE V. PROVISIONS RELATING TO THE TRUST ESTATE

(1) SPENDTHRIFT PROVISION

No interest of any beneficiary in the income or principal of any trust shall be subject to pledge, assignment, sale or transfer in any manner, nor shall any beneficiary have power in any manner to anticipate, charge or encumber his or her interest, nor shall the interest of any beneficiary be liable while in the possession of the Trustee for the debts, contracts, liabilities, engagements or of the beneficiary.

(2) PERSON WITH A SEVERE AND CHRONIC OR PERSISTENT DISABILITY

9

89

Any provision hereof to the contrary notwithstanding, if any person (other than the

Grantor or Grantor's spouse) with a severe and chronic or persistent disability as defined by

Section 7-1.12 of the New York Estates, Powers and Trusts law, as amended, is entitled to a trust share hereunder, then said beneficiary's interest in the trust share shall be held and managed by the Trustee for the benefit of said beneficiary, as provided for herein.

(a) The Trustee shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of the beneficiary, so much (even to the extent of the whole) of the net income and/or principal of this Trust as the Trustee shall deem advisable, in his or her sole and absolute discretion, subject to the limitations set forth below. The Trustee shall add to the principal of such Trust the balance of net income not so paid or applied.

(b) It is the Grantor's intent to create a Supplemental Needs Trust which conforms to the provisions of Section 7-1.12 of the New York Estates, Powers and Trusts law, or any successor statute thereto.

The Grantor intends that the Trust assets be used to supplement, not supplant, impair or diminish any benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving.

Consistent with that intent, it is the Grantor's desire that, before expending any amounts from the net income and/or principal of this Trust, the Trustee consider the availability of all benefits from government or private assistance programs for which the beneficiary may be eligible and that, where appropriate and to the extent possible, the Trustee endeavor to maximize

10

90 the collection of such benefits and to facilitate the distribution of such benefits for the benefit of the beneficiary.

(c) None of the income or principal of this Trust shall be applied in such a manner as to supplant, impair or diminish benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving.

(d) The Grantor directs that the provisions of Section 7-1.6 of the Estates, Powers and

Trust Law of the State of New York, or any successor statute thereto, shall not be available to require any invasion of principal by the Trustees or any court.

(e) The beneficiary does not have the power to assign, encumber, direct, distribute or authorize distributions from this Trust.

(f) Notwithstanding the above provisions, the Trustee may make distributions to meet the beneficiary's need for food, clothing, shelter or health care even if such distributions may result in an impairment or diminution of the beneficiary's receipt or eligibility for government benefits or assistance but only if the Trustee determines that (i) the beneficiary's needs will be better met if such distribution is made, and (ii) it is in the beneficiary's best interests to suffer the consequent effect, if any, on the beneficiary's eligibility for or receipt of government benefits or assistance; provided, however, that if the mere existence of the Trustee's authority to make distributions pursuant to this paragraph shall result in the beneficiary's loss of government benefits or assistance, regardless of whether such authority is actually exercised, this paragraph shall be null and void and the Trustee's authority to make such distributions shall cease and shall be limited as provided above, without exception.

11

91 (g) Upon the demise of said beneficiary, any balance remaining of the trust share shall be distributed to said beneficiary's issue, per stirpes; and if none living, to Grantor's beneficiaries named under Article IV, as if said beneficiary predeceased the Grantor.

(h) JOHN SMITH is hereby appointed Trustee of the Supplemental Needs Trust. If for any reason, JOHN SMITH is unable or unwilling to serve as Trustee, JOE SMITH shall serve as successor Trustee.

(3) GRANTOR TRUST STATUS

The Grantor intends for the Trust to be treated as a “Grantor Trust” for income tax purposes in accordance with Internal Revenue Code Sections 671 to 678, the effect of which is that the Grantor will be taxed on the income of the Trust.

(4) COMMON DISASTER

If any beneficiary including Grantor's spouse shall die simultaneously with the Grantor or in such circumstances that there is not sufficient evidence to determine the order of our , then it shall be presumed that the Grantor survived such beneficiary and the provisions of this

Trust shall be construed on that assumption, unless otherwise provided herein.

ARTICLE VI. POWERS AND DUTIES OF TRUSTEE

(1) INVESTMENTS

(a) The Trustee hereunder (including any Successor Trustee) shall have the continuing, absolute and discretionary power to deal with any property, real or personal, held in such

Trust(s). Such power may be exercised independently and without the prior or subsequent 12

92 approval of any court or judicial authority, and no person dealing with such Trustee shall be required to inquire into the propriety of any of the actions of such Trustee. The Trustee shall not be limited to the type and character of investments in which he or she may invest the funds of this Trust, so long as the Trustee uses reasonable prudence and judgment in the selection of investments. The Trustee shall have the following general powers, in addition to, and not by way of limitation of, the powers provided by Section 11-1.1 of the New York Estates, Powers and

Trusts Law:

1. To retain any property contributed by the Grantor, so long as such retention appears advisable, and to exchange any such property for other properties and to retain such items received in exchange. The Trustee may presume that the Grantor has confidence in the property owned by the Grantor and added to the Trust Estate, and, therefore, no sale thereof shall be made solely in order to diversify investments or to convert said asset to income producing property.

2. To retain such property for any period, whether or not the same be of the character permissible for investments by fiduciaries under any applicable law, and without regard to any effect the retention may have upon the diversification of the investments.

3. To borrow monies with security upon such terms as to rate and maturity and in other respects as the Trustee may deem proper, and to secure the repayment of any and all amounts so borrowed by mortgage or pledge of any property. All such payment(s), including any Trustee's fees incurred by reason of such payments, shall be charged generally against and made from the

Trust Estate; provided, however, that no such payment shall be made from the proceeds of any qualified pension or profit sharing plan received by the Trustee.

4. To lease, with or without consideration, any such property beyond the period fixed by statute for leases made by a Trustee and beyond the duration of the Trust Estate or any Trust created hereunder. 13

93 5. To invest any part or all of the principal of the Trust Estate in any common trust fund, legal or discretionary, which may be established and operated by and under the control of the

Trustee.

6. To improve real property and to pay the cost out of principal.

7. To permit any person having an interest in the income of the trust to occupy real property upon such terms as the trustee deems proper, whether rent free or for the payment of taxes, insurance, maintenance and ordinary repairs, or other expenses.

8. To sell, transfer, exchange, convert or otherwise dispose of, or grant options with respect to any security or property, real or personal, held in any trust fund hereunder at public or private sale, with or without security, in such manner, at such time or times, for such purposes, for such prices and upon such terms, credits and conditions as the Trustee may deem advisable.

9. To allocate in the Trustee's sole discretion, in whole or in part, to principal or income, all receipts and disbursements for which no express provision is made hereunder, which allocation shall fully protect the Trustee with respect to any action taken or payment made in reliance thereon.

Notwithstanding the above, in no event shall the Trustee adjust between income and principal if such adjustment would cause any public benefit program to consider the adjusted principal or income to be an available resource or available income or if such adjustment would otherwise supplant any governmental benefit that any beneficiary is entitled to receive.

The Trustee shall administer this trust according to its terms even if such terms conflict with New York Estates Powers and Trusts Law §11-2.3(b)(5)(A) as amended.

10. A Trustee shall not have the power to elect the optional uni-trust provisions as created under New York Estates Powers and Trusts Law §11-2.4.

14

94 11. The Trustees hereunder are empowered to act severally as to the above powers, including but not limited to transactions with financial institutions and banks.]

(2)

The Trustee shall render to the then current income beneficiary(s), statements of account of receipts and disbursements at least annually. In addition, a Trustee shall account to the then current income beneficiary(s) upon resignation of said Trustee within thirty (30) days from the said resignation.

ARTICLE VII. PROVISIONS RELATING TO TRUSTEE

(1) COMPENSATION

The Trustee shall be entitled to receive a statutory commission for services rendered hereunder as provided for under New York law and shall also be reimbursed for all reasonable expenses incurred in the management and protection of the Trust Estate and travel and lodging expenses to and from the Trustee's residence and the residence of the Grantor or Grantor's spouse as frequently as the Trustee determines in the Trustee's sole discretion.

(2) LIMITATIONS ON TRUSTEE-BENEFICIARY

Notwithstanding anything herein to the contrary, no individual Trustee who is also a beneficiary hereunder shall have any right, power, duty or discretion hereunder concerning the

Trust Estate, if such right, power, duty or discretion conferred upon said Trustee under this

Agreement is determined to be a general power of appointment under Section 2041 of the

Internal Revenue Code of 1986, as amended, which would cause any assets of the Trust Estate to

15

95 be included in the estate of said Trustee-Beneficiary at death. Any such right, power, duty or discretion with such effect shall be null and void with respect to said Trustee-Beneficiary. In such event, any other Trustee(s) shall have the full authority to act.

(3) BOND

No bond or other security shall be required of any non-corporate Trustee.

(4) HOLD HARMLESS

No Trustee shall be liable or responsible for any loss or damage arising by reason of any act or omission to or by the Trustee or in connection with any activities carried out under this

Trust, except for the Trustee's own gross , willful neglect or unlawful act.

(5) CO-TRUSTEES

In the event there are Co-Trustees hereof, the provisions applicable to the Trustee shall be applicable to each Co-Trustee.

ARTICLE VIII. TRUSTEES

(1) APPOINTMENT OF SUCCESSOR TRUSTEES

(a) Upon the death, incapacity, resignation or discharge of either Co-Trustee, the remaining Co-Trustee shall continue to act alone. The remaining Co-Trustee, in his or her sole discretion, may appoint a Co-Trustee or Successor Trustee.

(b) If any Successor Trustee shall fail to serve or shall resign, the Trustee may designate in writing a Successor Trustee. If the Trustee fails to designate or said Successor Trustee fails to accept such appointment within ten (10) days, the then current income beneficiary who is of 16

96 legal age and the guardians of any incompetent then current income beneficiary shall appoint a

Successor Trustee.

(2) REMOVAL AND RESIGNATION OF TRUSTEES

(a) The Grantor reserves the right to remove a trustee upon three (3) days written notice and replace said Trustee with a Successor Trustee (other than the Grantor or Grantor's spouse). In the event the Grantor removes but fails to replace the Trustee, then the Successor Trustee as provided for herein shall replace the Trustee. No Successor Trustee, whether appointed by the

Settlor or designated by another, shall have the right to invade principal and/or revoke the Trust for the benefit of the Settlor.

ARTICLE IX. MISCELLANEOUS

(1) PERPETUITIES SAVINGS PROVISION

Notwithstanding any provision herein to the contrary, any and all trusts created herein shall terminate no later than 21 years after the death of all of Grantor's descendants living on the date of this Agreement and, if any trust shall so terminate, all property then belonging to the income or principal shall be distributed to the beneficiary(s) named herein free of Trust.

(2) HEADINGS AND USAGES

The paragraph headings used are for convenience only and shall not be resorted to for interpretation of this Trust. Wherever the context so requires, the masculine shall include the feminine and neuter and the singular shall include the plural.

17

97 (3) VALIDITY OF PROVISIONS

If any portion of this Trust is held to be void or unenforceable, the balance of this Trust shall nevertheless be carried into effect.

IN WHEREOF, JANE DOE, Grantor, JOHN SMITH and JOE SMITH, Co- Trustees, have signed and sealed this Trust Agreement.

______JANE DOE, Grantor

______JOHN SMITH, Co-Trustee

______JOE SMITH, Co-Trustee

[Acknowledgements]

18

98 EXHIBIT A TO THE [NAME OF GRANTOR] IRREVOCABLE TRUST

DATED:[date of execution]

[Description of assets contributed to the trust]

Receipt of the above

listed items is

hereby acknowledged

by:

______[Name of Grantor], Grantor

[Name of co-trustee1], Co-Trustee

______[Name of co-trustee2], Co-Trustee

DATED: [date of acknowledgment]

______

19

99 100 JOHN DOE TRUST SAMPLE THIRD PARTY TRUST

THIS TRUST AGREEMENT made and entered into this ____ day of January, 2017, between JANE DOE, Grantor, with address at ______(hereinafter referred to as the “Grantor”), and JANE DOE, Trustee, residing at ______(hereinafter referred to as the “Trustee”).

WHEREAS, the Grantor desires to provide for the supplemental needs of JOHN DOE (hereinafter sometimes referred to as “JOHN”) by placing assets into this Trust to be held by the Trustee as part of the Trust Estate (said monies being hereinafter referred to collectively as the “Trust Estate”) for purposes hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Trustee agrees to hold the Trust Estate, IN TRUST, NEVERTHELESS, for the following uses and purposes and subject to the terms and conditions hereinafter set forth:

ARTICLE 1 GENERAL PROVISIONS

(1) LAWS GOVERNING. This Agreement shall be construed and regulated in all respects by the laws of the State of New York. This Trust Agreement shall be interpreted and the administration of the Trust shall be governed by the laws of the State of New York; provided, however, that Federal law shall govern any matter alluded to herein that shall be related to or involve government entitlements such as SSI, Medicaid and or other federal benefit programs.

(2) NAME OF TRUST. This Trust shall be known as the “JOHN DOE TRUST” and it shall be sufficient that it be referred to as such in any deed, assignment, bequest or devise.

(3) PURPOSE. 1. This Trust is created expressly for the sole benefit of JOHN DOE. This Trust is to enable JOHN DOE to qualify or continue to qualify for medical assistance under the Medicaid program as provided for by the Omnibus Budget Reconciliation Act of 1993 ( “OBRA 1993”). In the administration of the Trust, the Trustees shall undertake all acts necessary to establish and maintain JOHN DOE’s eligibility for medical assistance under the Medicaid program.

(4) TRUST IRREVOCABLE. This Trust is hereby declared to be irrevocable and it shall not at any time, by any person or persons, be amended, altered or modified in any manner.

Notwithstanding the above to the contrary, in the event that the Trust Estate is challenged or faces imminent invasion by any governmental department or agency in such a way as to affect JOHN DOE's eligibility for benefits available under any governmental program, the Trustee or a Court of competent jurisdiction is empowered to amend this Trust so as to maintain JOHN DOE's eligibility for benefits under such governmental program.

1

101

(5) FAMILY MEMBERS. At the time of the execution of this Trust, JOHN DOE’s Family consists of:

LIST FAMILY MEMBERS

(6) ADDITIONS TO CORPUS. Grantor, with written notice to the Trustee, may add from time to time to the Trust Estate any property by deed, Will or otherwise. In no event can JOHN DOE add his own assets to the Trust Estate.

ARTICLE II DISTRIBUTION OF INCOME AND PRINCIPAL DURING LIFETIME OF JOHN DOE

The Trustee shall hold, manage, invest and reinvest the trust share for JOHN DOE's benefit, as provided for herein.

(a) The Trustee shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of JOHN DOE, in-kind, so much (even to the extent of the whole) of the net income and/or principal of this Trust as the Trustee shall deem advisable, in his or her sole and absolute discretion, subject to the limitations set forth below. The Trustee shall add to the principal of such Trust the balance of net income not so paid or applied.

(b) It is Grantor's intent to create a Supplemental Needs Trust that conforms to the provisions of Section 7-1.12 of the New York Estates, Powers and Trusts law, or any successor statute thereto.

Grantor intends that the Trust assets be used to supplement, not supplant, impair or diminish, any benefits or assistance of any federal, state, county, city, or other governmental entity for which JOHN DOE may otherwise be eligible or that JOHN DOE may be receiving. Consistent with that intent, it is Grantor's desire that, before expending any amounts from the net income and/or principal of this Trust, the Trustee consider the availability of all benefits from government or private assistance programs for which JOHN DOE may be eligible and that, where appropriate and to the extent possible, the Trustee endeavor to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of JOHN DOE.

(c) USE OF INCOME OR PRINCIPAL. None of the income or principal of this Trust shall be applied in such a manner as to supplant, impair or diminish benefits or assistance of any federal, state, county, city, or other governmental entity for

2

102 which JOHN DOE may otherwise be eligible or which JOHN DOE may be receiving.

(d) EPTL §7-1.6. Grantor directs that the provisions of Section 7-1.6 of the Estates, Powers and Trust Law of the State of New York, or any successor statute thereto, shall not be available to require any invasion of principal by the Trustees or any court.

(e) JOHN DOE does not have the power to assign, encumber, direct, distribute or authorize distributions from this Trust.

(f) In the event that the Trust Estate shall be challenged or in any way threatened with invasion of its funds by any governmental agency or creditor of JOHN DOE or his estate, the Trustee is authorized and empowered, in the Trustee's sole and absolute discretion, to terminate the Trust or any part thereof, and to distribute the remaining trust corpus and any accumulated or accrued income to the beneficiaries named herein as if JOHN DOE is deceased.

(g) FOOD AND SHELTER. Notwithstanding the above provisions, the Trustee may make distributions to meet JOHN DOE’s need for food, shelter or health care even if such distributions may result in an impairment or diminution of JOHN DOE’s receipt or eligibility for government benefits or assistance but only if the Trustee determines that: JOHN DOE’s needs will be better met if such distribution is made, and (ii) it is in JOHN DOE’s best interests to suffer the consequent effect, if any, on his eligibility for or receipt of government benefits or assistance

(h) NULLIFICATION OF PARAGRAPH (g). Provided, however, that if the mere existence of the Trustee's authority to make distributions pursuant to Paragraph(g) shall result in JOHN DOE’s loss of government benefits or assistance, regardless of whether such authority is actually exercised, this paragraph shall be null and void and the Trustee's authority to make such distributions shall cease and shall be limited as provided above, without exception.

(i) Notwithstanding the above provisions to the contrary, if in order to qualify the funding of this Trust as a Medicaid exempt transfer by the Grantor and to qualify this Trust as an unavailable resource for purposes of Medicaid eligibility of JOHN DOE, then the Trustee shall provide for the spending of the Trust assets for the benefit of JOHN DOE on a basis that is actuarially sound based on JOHN DOE’s life expectancy.

(j) OTHER NEEDS AND COMFORTS. The Trustee has discretion to use income and/or principal to insure that the beneficiary enjoys the therapeutic benefits of education, vocational training, hobbies, vacations, modes of transportation, entertainment and any other need and/or comforts JOHN DOE

3

103 may require to enhance his quality of life. This discretion shall include the use of income for needed medical care not paid for by private health insurance or government entitlements. This provision shall include the purchase of any equipment, treatment, computer, services or goods that would enhance the quality of JOHN DOE’s life.

ARTICLE III ADMINISTRATION OF THE ESTATE OF JOHN DOE

Upon JOHN DOE’s death, the Trustee, in the Trust’s sole and absolute discretion, may pay directly or indirectly: (i) funeral expenses of JOHN DOE’s, (ii) any and all death taxes imposed upon JOHN DOE’s estate, (iii) court filing fees of a probate, administration or estate proceeding and any and all legal and accounting fees related to JOHN DOE’s estate.

ARTICLE IV DISPOSITION OF TRUST ESTATE UPON JOHN DOE’S DEMISE

(1). DISTRIBUTIONS.

(a) In the event JOHN DOE predeceases the Grantors, then the Trust shall terminate and the Trustees shall pay and distribute the Trust Estate to the issue of JOHN DOE, per stirpes and subject to the provisions of Article V herein. In the further event JOHN DOE predeceases the Creators leaving no surviving issue, the Trustees shall pay and distribute the Trust Estate to the issue of the Creators, per stirpes.

(b) In the event Creators predecease JOHN DOE, then upon the death of JOHN DOE, the Trustees shall immediately pay and distribute the Trust Estate to the issue of JOHN DOE per stirpes and subject to the provisions of Article V herein. In the event JOHN DOE leaves no surviving issue, the Trustees shall pay and distribute the Trust Estate to the issue of the Creators, per stirpes.

(2). DISTRIBUTION TO CONTINGENT BENEFICIARIES. In the event that none of Grantor’s beneficiaries names hereunder survive to the time the Trust Estate is to vest, then, at the death of the last of them, the then remaining Trust Estate shall be distributed to Grantor’s heirs at law under the laws of the State of New York.

(3) DISTRIBUTIONS TO BENEFICIARIES UNDER AGE TWENTY FIVE. Notwithstanding any above provision to the contrary, if under this Article any such share shall become payable to a beneficiary who is less than twenty-five (25) years of age, then the Trustees shall distribute the entire balance of the principal so held in one lump sum to said

4

104 beneficiary at age twenty-five (25), and, in the meantime, the Trustees shall pay as much of the net income and/or principal of said share as the Trustees shall deem necessary or proper in the Trustees’ sole discretion to or for the benefit of said beneficiary and his or her legal dependents, if any, including education. In the event said beneficiary does not attain age twenty-five (25), then the balance of said share shall be distributed to said beneficiary's issue, per stirpes.

(4) PERSON WITH A SEVERE AND CHRONIC OR PERSISTENT DISABILITY Any provision hereof to the contrary, if any person (other than the Grantor) with a severe and chronic or persistent disability as defined by Section 7-1.12 of the New York Estates, Powers and Trusts law, as amended, is entitled to a trust share hereunder, then said beneficiary’s interest in the trust share shall be held and managed by the Trustee for the benefit of said beneficiary, as provided for herein. A. The Trustee shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of the beneficiary, so much (even to the extent of the whole) of the net income and/or principal of this Trust as the Trustee shall deem advisable, in their sole and absolute discretion, subject to the limitations set forth below. The Trustee shall add to the principal of such Trust the balance of net income not so paid or applied. B. It is the Grantor’s intent to create a Supplemental Needs Trust which conforms to the provisions of Section 7-1.12 of the New York Estates, Powers and Trusts law, or any successor statute thereto. The Grantor intends that the Trust assets be used to supplement, not supplant, impair or diminish any benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving. Consistent with that intent, it is the Grantor’s desire that, before expending any amounts from the net income and/or principal of this Trust, the Trustee consider the availability of all benefits from government or private assistance programs for which the beneficiary may be eligible and that, where appropriate and to the extent possible, the Trustee endeavors to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of the beneficiary. C. None of the income or principal of this Trust shall be applied in such a manner as to supplant, impair or diminish benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving. D. No of any Court shall have the power to order the invasion of principal in contravention of this provision. This provision is intended to negate and eliminate any discretion granted to any Court by Section 7-1.6 of the Estates Powers and Trusts Law (E.P.T.L.). E. The beneficiary does not have the power to assign, encumber, direct, distribute or authorize distributions from this Trust. F. Notwithstanding the above provisions, the Trustee may make distributions to meet the beneficiary’s need for food, clothing, shelter or health care even if such distributions may result in an impairment or diminution of the beneficiary’s receipt or eligibility for government benefits or assistance but only if the Trustee determines that:

5

105 (i) the beneficiary’s needs will be better met if such distribution is made, and (ii) it is in the beneficiary’s best interests to suffer the consequent effect, if any, on the beneficiary’s eligibility for or receipt of government benefits or assistance; provided, however, that if the mere existence of the Trustee’s authority to make distributions pursuant to this paragraph shall result in the beneficiary’s loss of government benefits or assistance, regardless of whether such authority is actually exercised, this paragraph shall be null and void and the Trustee’s authority to make such distributions shall cease and shall be limited as provided above, without exception. G. Upon the demise of said beneficiary, any balance remaining of the trust share shall be distributed to JACK DOE; or, if JACK DOE shall not then be living, then to the surviving issue of the parent of the beneficiary per stirpes and subject to the provisions of ARTICLE IV (4) herein.

ARTICLE V PROVISIONS RELATING TO THE TRUST ESTATE

(1) SPENDTHRIFT PROVISION. No interest of any beneficiary in the income or principal of any trust shall be subject to pledge, assignment, sale or transfer in any manner, nor shall any beneficiary have power in any manner to anticipate, charge or encumber his or her interest, nor shall the interest of any beneficiary be liable while in the possession of the Trustee for the debts, contracts, liabilities, engagements or torts of the beneficiary.

(2) GRANTOR'S POWERS. The Grantor reserves the power to reacquire the Trust principal by substituting other property of an equivalent value.

ARTICLE VI POWERS AND DUTIES OF TRUSTEE

(1) INVESTMENTS. The Trustee of each Trust established hereunder (including any Successor Trustee) shall have the continuing, absolute and discretionary power to deal with any property, real or personal, held in such Trust(s). Such power may be exercised independently and without the prior or subsequent approval of any court or judicial authority, and no person dealing with such Trustee shall be required to inquire into the propriety of any of the actions of such Trustee. The Trustee shall not be limited to the type and character of investments in which the Trustee may invest the funds of this Trust, so long as the Trustee uses reasonable prudence and judgment in the selection of investments. The Trustee shall have the following general powers, in addition to, and not by way of limitation of, the powers provided by Section 11-1.1 of the New York Estates, Powers and Trusts Law:

6

106 1. To retain any property so long as such retention appears advisable, and to exchange any such property for other properties and to retain such items received in exchange. 2. To retain such property for any period, whether or not the same be of the character permissible for investments by fiduciaries under any applicable law, and without regard to any effect the retention may have upon the diversification of the investments. 3. To lease any such property beyond the period fixed by statute for leases made by a Trustee and beyond the duration of the Trust Estate created hereunder. 4. To borrow money for any purpose from any source including the Trustee hereunder, and to secure the repayment of any and all amounts so borrowed by mortgage or pledge of any property. 5. To invest any part or all of the principal of the Trust Estate in any common trust fund, legal or discretionary, which may be established and operated by and under the control of the Trustee. 6. To allocate in the Trustee's sole discretion, in whole or in part, to principal or income, all receipts and disbursements for which no express provision is made hereunder, which allocation shall fully protect the Trustee with respect to any action taken or payment made in reliance thereon. We have added language to prevent assets being available to Medicaid. 7. To retain and pay for the benefit of the estate and any beneficiary hereunder attorneys, accountants, financial planners, social workers, health care professionals and any other professional required in the sole discretion of the Trustee, subject to the limitations of Article II. 8. To sell, transfer or exchange any and all Trust assets, real or personal, including the Grantor's residence.

(2) ADDITIONAL POWERS. The foregoing provisions notwithstanding, it is recognized that the Trustee is neither licensed nor skilled in the field of social services. The Trustee may seek the counsel and assistance of JOHN DOE’s guardian, if any, of JOHN DOE’s physician(s), and of any state and local agencies that have been established to assist the handicapped or mentally disabled, and similar resources. The Trustee may use these resources to aid JOHN DOE’s guardian, if any, as appropriate, in identifying programs that may be of social, financial, developmental or other assistance to JOHN DOE. However, the Trustee shall not in any event be liable to JOHN DOE the remainder beneficiaries of the Trust or any other party for his acts as Trustee hereunder so long as he acts reasonably and in . For example, the Trustee, as well as JOHN DOE’s guardian, if any, shall not be liable for the failure to identify each and every program or resource that might be available to JOHN DOE on account of his disabilities.

(3) ACCOUNTINGS. The Trustee shall render to the then current income beneficiary(s), statements of account of receipts and disbursements at least annually, upon the written request of a beneficiary. In addition, a Trustee shall account to the then current income beneficiary(s) upon resignation of said Trustee within thirty (30) days from the said resignation.

(4) LIMITATIONS ON TRUSTEE-BENEFICIARY. Notwithstanding anything

7

107 herein to the contrary, no individual Trustee who is also a beneficiary hereunder shall have any right, power, duty or discretion hereunder concerning the Trust Estate, if such right, power, duty or discretion conferred upon said Trustee under this Agreement is determined to be a general power of appointment under Section 2041 of the Internal Revenue Code of 1986, as amended, which would cause any assets of the Trust Estate to be included in the estate of said Trustee- Beneficiary at death. Any such right, power, duty or discretion with such effect shall be null and void with respect to said Trustee-beneficiary. In such event, the other Trustee(s) shall have the full authority to act.

ARTICLE VII TRUSTEES

(1) APPOINTMENT OF TRUSTEES. Grantor hereby nominates JANE DOE as Trustee.

(2) APPOINTMENT OF SUCCESSOR TRUSTEES. Upon the death, incapacity, resignation or discharge of JANE DOE, JACK DOE, residing at , shall be the Successor Trustee.

(3) REMOVAL AND RESIGNATION OF TRUSTEES.

(a) A Trustee may resign by giving written notice, a signed and acknowledged instrument, delivered to (i) JOHN DOE; (ii) the Guardian of JOHN DOE, if any; (iii) any Successor Trustee; (iv) the Grantor; and (v) the local Social Service agency. (b) The Grantor reserves the right to remove any Trustee upon three (3) days written notice and replace said Trustee with a Successor Trustee. In the event the Grantor removes but fails to replace the Trustee, then the Successor Trustee as provided for herein shall replace the Trustee.

(4) HOLD HARMLESS. No Trustee shall be liable or responsible for any loss or damage arising by reason of any act or omission to or by the Trustee or in connection with any activities carried out under this Trust, except for the Trustee's own , willful neglect or unlawful act.

(5) COMPENSATION. The Trustee shall be entitled to receive compensation for services rendered hereunder as may be allowable under the laws of the State of New York and shall also be reimbursed for all reasonable expenses incurred in the management and protection of the Trust Estate and travel and lodging expenses to and from the Trustee's residence and the residence of the beneficiary hereunder as frequently as the Trustee determines in the Trustee's sole discretion.

(6) BOND. No bond or other security shall be required of any Trustee or Successor Trustee named hereunder.

8

108 ARTICLE VIII MISCELLANEOUS

(1) PARAGRAPH HEADINGS. The paragraph headings used are for convenience only and shall not be resorted to for interpretation of this Trust. Wherever the context so requires, the masculine shall include the feminine and neuter and the singular shall include the plural.

(2) VALIDITY OF PROVISIONS. If any portion of this Trust is held to be void or unenforceable, the balance of this Trust shall nevertheless be carried into effect.

IN WITNESS WHEREOF, JANE DOE, Grantor, and JANE DOE, Trustee, have signed and sealed this Trust Agreement.

______JANE DOE, Grantor

______JANE DOE, Trustee

STATE OF NEW YORK ) ) ss.: COUNTY OF )

On the ______day of______, in the year 2017, before me, the undersigned, a Notary Public in and for said state, personally appeared ______personally known to me or proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that (s)he executed the same in his/her capacity, and that by his/her signature on the instrument, the person or the entity upon behalf of which the person acted, executed the instrument.

Notary Public

9

109 Exhibit A to the JOHN DOE Trust DATED January , 2017:

Receipt of the above listed items is hereby acknowledged by:

______JANE DOE, Trustee

DATED:

______WITNESS

10

110 Anatomy of a Trust: Irrevocable Medicaid Income Only Trusts

ELIZABETH FORSPAN, ESQ. April 2017

www.fatoullahlaw.com

1‐877‐ELDER‐LAW or 1‐877‐ESTATES 212‐751‐7600 ‐ 516‐466‐4422 ‐ 718‐ 261‐1700

111 Basic Medicaid Eligibility Rules

• Overview of the Medicaid Asset and Income Requirements • Medicaid Transfer Penalties • Exempt Transfers • Non‐exempt Transfers

www.fatoullahlaw.com 2

112 Overview of the Medicaid Asset and Income Requirements

1. Assets: – The Medicaid applicant may keep up to $14,850 plus exempt assets – The well spouse in the community may keep $74,820 or ½ of the couple’s assets, but no greater than $120,900 2. Income: – For Nursing Home care (Institutional Medicaid), a Medicaid applicant may only keep a $50 personal needs allowance plus any cost of health insurance premiums – The well spouse in the community can keep up to $3,022.50 of the total household income – For Home Care (Community Medicaid), a Medicaid applicant may only keep $825/month ($1,209/month for a couple) + $20 disregard for a total of $845/month • An Applicant for Home Care may keep income in excess of the Medicaid allowable limits through the use of a Pooled Trust 3. A spouse can sign a Spousal Refusal – but again, beware of spousal suits! 4. The five year look-back period applies to Nursing Home Medicaid, but NOT to Community Medicaid

www.fatoullahlaw.com 3

113 Medicaid Transfer Penalties

• When an individual applies for Medicaid nursing home care, Medicaid will look back 5 years to see what assets the applicant and spouse (if any) had, and what assets were gifted away.

• If money was gifted during the look-back, Medicaid calculates a so-called “penalty period” that will cause the applicant to become ineligible for Medicaid coverage for a period of time.

• For NYC applicants, every $12,157 ($12,198 for Northern Metro area and $12,811 for Long Island) that is gifted away during the look-back will create a one month period of ineligibility

• Period starts when applicant is institutionalized, applies for Medicaid benefits and is “otherwise eligible” except for gifts.

• For example, a transfer of $121,570 within the 5-year lookback period will create a 10 month period of ineligibility (for NYC applicants using the NYC regional rate).

www.fatoullahlaw.com 4

114 Exempt Transfers

• “Exempt transfers” refer to gifts made during the look-back that will not cause a Medicaid penalty period • Exempt transfers include: 1. Transfers to the well spouse… but beware of spousal limits and spousal 2. Transfers to applicant’s blind or disabled child of any age… but beware of any effect on the child’s own benefits (e.g. Medicaid, SSI) 3. Transfers for fair market value 4. Transfers made exclusively for a purpose other than qualifying for Medicaid (difficult to get) 5. Transfers that have been returned (“Return of Gift”)

www.fatoullahlaw.com 5

115 Exempt Transfers of the Home • Exempt transfers of the primary residence (the “Homestead”) 1. Transfer of the home to a spouse 2. Transfer of the home to a disabled, blind or minor child (but consider the child’s benefits!) 3. Transfer of the home to a sibling of the A/R with an interest and who resided in the home for one year prior to institutionalization 4. Transfer of the home to an adult caregiver child who resided in the home for at least two years prior to institutionalization (“Caretaker Child” exception) Home Equity Limitation: The Deficit Reduction Act of 2005 signed by President Bush on February 8, 2006 expanded the look-back to 5 years and also provided for a limitation on the equity value of a home in order to qualify for Medicaid • The equity limitation is currently $840,000 • Value of homes, condos & co-ops in NYC, Westchester and Long Island often exceed $840,000 • Equity limitation does not apply if there is a spouse or a minor, blind or disabled child living in the home www.fatoullahlaw.com 6

116 Tax Implications of Outright Transfers vs. Transfer to Trusts • Transfers of Real Property Including Principal Residence • Transfer of Liquid Assets • Basis Issues

www.fatoullahlaw.com 7

117 Outright Transfers to Transfers Trust (Gifts) • Carryover Basis • Basis Step‐Up • No Sec. 121(a) • Sec. 121(a) is for Donor available for • Creditor Issues Grantor(s) • Pre‐deceased • child/Donee •

www.fatoullahlaw.com 8

118 Outright Transfer of Home Subject to (primary residence) – Starts the Medicaid penalty period for nursing home Medicaid eligibility – Penalty period is reduced by the value of the life estate – Basis step-up at the time of death – Includable in the taxable estate under IRS Section 2036 (a) – Value of life estate is not considered an asset for Medicaid eligibility – Example: Mom transfers her home, bought for $12k but now valued at $700k, to her 2 children subject to a life estate – BUT, PROBLEM IF SOLD DURING LIFETIME: No full $250,000 exclusion (IRS Section 121 (a)) on entire home, and value of life estate is deemed an asset (ineligibility period) – Section 121(a) exclusion will only apply as to the value of the life estate

www.fatoullahlaw.com 9

119 Irrevocable Medicaid Income Only Trust: Required Terms of Trust • Trust Requirements: – Must be Irrevocable – Settlor should not serve as Trustee (best practice) – Ensure that no principal goes to the Grantor – Any principal or income that can be distributed to the Grantor or Grantor’s spouse will be considered available for Medicaid purposes – Discretionary payments to Grantor / Grantor’s spouse will be available even if subject to an ascertainable standard • “HEMS” will not be acceptable for Medicaid purpose • 5 x 5 power is not good • Ensure Trustee discretion – Be careful with the ability to swap assets and changing Trustees

www.fatoullahlaw.com 10

120 Irrevocable Medicaid Income Only Trust:

• Advantages: . Considered a completed transfer for Medicaid purposes . Decision-making can be easier and more efficient . Can provide protection against children’s creditors . Income tax benefits . Real Estate tax exemptions . IRC Section 121 Exemption can be maintained . Can preserve step-up in basis upon Settlor’s death . Can reserve limited power of appointment to make limited changes to beneficiaries

www.fatoullahlaw.com 11

121 Irrevocable Medicaid Income Only Trust:

• Disadvantages: . Loss of control/independence . More costly / complicated . Difficult to mortgage real estate . Excess income considerations – i.e. Does the trust provide income to the Settlor? Will that result in high spend-down if Medicaid is needed at a later date . If so, consider giving income to another beneficiary . Beware high trust income tax rates

www.fatoullahlaw.com 12

122 Protecting Residence Within Irrevocable Trust: Transfers of Real Property Including Principal Residence to a Trust

– Ability to live in home – Ability to receive rental income (if desired) – May direct Trustees to sell property and exchange for new property – Section 121 Exclusion – Maintain basis step-up – Asset included in estate of Settlor – Limited Power of Appointment – Maintain degree of control/independence www.fatoullahlaw.com 13

123 IRC Section 121(a)

• Up to $250,000.00 of gain excluded from gross income • On sale/exchange of property • Property owned and used as principal residence for periods aggregating 2 years or more

www.fatoullahlaw.com 14

124 Section 121- Ownership Requirement

• Single owner entity disregarded for federal tax purposes (i.e. single member LLC) satisfies requirement • Grantor trusts – satisfies requirement • Limited partnership – does not satisfy requirement • Regs 1.121-1(c)(3)

www.fatoullahlaw.com 15

125 Transfers of Liquid Assets

• Transferring Brokerage Accounts to a Trust • Low basis versus high basis assets will inform decision in many cases – Maintain step-up for low basis assets – Completed gift and no estate inclusion for high basis assets (less relevant now in NY given the high NYS exclusions) – Consider income tax consequences for beneficiaries • Consider Grantor Trust so Grantor will pay income taxes regardless of who receives income • Consider income being generated for Medicaid purposes

www.fatoullahlaw.com 16

126 Transfers of Liquid Assets

• Transferring a Non-qualified Annuity to a Trust • Cash value is considered an asset for Medicaid purposes: non-exempt asset • Certain pre-DRA 2005 annuity rules apply: Medicaid may treat as income stream and not asset, but must meet DRA requirements • Goal is to maintain tax-deferred status • May only be transferred to a grantor trust • IRC Section 72(u)

www.fatoullahlaw.com 17

127 Annuity Contract- IRC 72(u)

• If held by a person who is NOT A NATURAL PERSON, generally not treated as an annuity contract • TRAP: Income on the contract for any taxable year of the policyholder shall be treated as ordinary income received or accrued by the owner during such taxable year • Exception: Will remain tax deferred if held by a trust “as an agent for a natural person.” . Will depend on the beneficial ownership – i.e. is the beneficial owner a natural person? . Legislative history and multiple PLRs suggest that where annuity held in trust for the benefit of a natural person, annuity is treated as owned by the natural person for tax deferral purposes. . Consider two trusts in the case of a married couple

www.fatoullahlaw.com 18

128 Tax Consequences of Medicaid Trusts

• Income Taxes • Estates Taxes • Real Estate Tax Exemptions

www.fatoullahlaw.com 19

129 Tax Consequences of Medicaid Trusts: Income Taxes • Calculating Taxable Income • In general, income earned by trust property is income earned by the trust • Party responsible for trust income taxes will depend – Trust itself where trust receives the income – Income Beneficiaries (can be Grantor or some other party) – Grantor in the case of a Grantor Trust

www.fatoullahlaw.com 20

130 Tax Consequences of Medicaid Trusts: Income Taxes • Calculating Taxable Income (cont.) • Trusts are taxed like individuals (however, rates vary significantly) • Trusts may deduct certain expenses • Trusts may have tax exempt income • Personal exemptions apply • No Standard deduction

www.fatoullahlaw.com 21

131 Tax Consequences of Medicaid Trusts: Income Taxes • Calculating Taxable Income (cont.) • General Rule for Trust Income Taxes – Income retained by the trust is taxed to the trust – Income distributed to beneficiaries are taxed to the beneficiaries • Exceptions to General Rule – Grantor Trusts • Where Grantor retains an interest in the trust or if another person has a power of appointment over trust income or principal, the trust income will be taxed to either the Grantor or the holder of the power of appointment – Charitable Remainder Trust • Charity is tax exempt so retained income is not taxable to the trust (distributions to beneficiaries will be, however)

www.fatoullahlaw.com 22

132 Tax Consequences of Medicaid Trusts: Income Taxes • Calculating Taxable Income (cont.) • Allowable Trust Deductions • Generally, the same as those allowed for an individual • Examples of allowable deductions: • Administrative expenses (e.g. trustee fees, bank fees, etc.) • State, local and real estate taxes • Estate expenses (check the governing instrument!) • Miscellaneous itemized deductions (2% floor of AGI)

www.fatoullahlaw.com 23

133 Estate and Gift Taxes

• Unified credit - $5,490,000.00 • Annual Gift Exclusion:$14,000 ($28,000 if married) – However, this amount is considered a “gift” for Medicaid purposes and will cause a period of ineligibility • Estate tax: 40% top rate • Gift tax: 40% top rate • New York State Current Exclusion: $4,187,500 (with many added complications! e.g. the “Cliff”)

www.fatoullahlaw.com 24

134 Anatomy of a Trust: Irrevocable Medicaid Income Only Trusts

ELIZABETH FORSPAN, ESQ. April 2017

www.fatoullahlaw.com

1‐877‐ELDER‐LAW or 1‐877‐ ESTATES 212‐751‐7600 ‐ 516‐466‐4422 ‐ 718‐261‐1700

135 136 QTIP (Marital Deduction Trusts) and Credit Shelter Trusts

by

Avi Z. Kestenbaum, Esq.

Melzter, Lippe, Goldstein and Breistone, LLP Mineola

Mariana Schwartsman, Esq. Attorney at Law New York City

137

138 NYSBA CLE COURSE

Meltzer, Lippe, Goldstein & Breitstone, LLP Avi Z. Kestenbaum, Esq. Marianna Schwartsman, Esq.

PART I. A CLOSER LOOK AT QTIP TRUSTS

Introduction: Structuring and incorporating tax planning into clients’ estates starts with understanding two basic premises of transfer taxation:

1. Estate taxes are not imposed on assets of any amount passing to a

surviving spouse (when second-to-die spouse is a US citizen), and

2. The exemption amount (or a dollar-for-dollar corresponding tax

credit amount) is an amount that is available at death to each spouse to shelter

from estate taxes irrespective of who is the immediate or ultimate recipient of the

“sheltered” assets. 1

I. QTIP Trust: A qualified terminable interest property (QTIP) trust is a type of trust that qualifies for the marital deduction and enables a client to (a) provide for a surviving spouse, and, at the same time, (b) retain control of how the trust's assets are disposed of once the surviving spouse dies. Income must be distributed to the surviving spouse to qualify for the most common type of QTIP trust, and, sometimes principal is drafted to be distributed to the surviving spouse to ensure that the spouse receives the needed lifetime liquidity.

1 Beware of generation skipping transfer taxes implications and state inheritance taxes, which are not subject of this lecture.

139

II. Provisions under the Internal Revenue Code: Section 2056(a) of the Code allows an unlimited marital deduction for citizen spouses from the value of the first-to-die spouse’s gross estate of an “amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse.” Section 2056(b)(1) disallows a decedent from taking the marital deduction if he passes a “terminable interest” to his surviving spouse.

What is a "terminable interest"? It is an interest in property that expires due to the passage of time or due to the occurrence of some future event or a failure of some event to occur.

While terminable interests most often do not qualify for a marital deduction, the law provides a certain criteria when such terminable interests do qualify for the deduction. Terminable interests can include life estates, terms of years, or defeasible fees passed from the first-to-die spouse to the surviving spouse.

III. Why do QTIPs work? The IRS authorized a specific class of terminable interest trusts -

QTIP trusts - in 1982 by statute, namely, the Marital Deduction Trusts envisioned by subsections

2056(b)(5) and 2056(b)(7). To simplify the thinking behind this statutory authorization, qualified terminal interest property trust supports a surviving spouse, thus qualifying for the unlimited marital deduction when structured according to the statutory requirements under the Code. At the same time, QTIP trust maintains a mechanism that ensures the ultimate distribution of the remaining property of the trust to those beneficiaries that the first-to-die spouse chooses.

A. QTIP trusts are used when spouses have children from prior marriages or

other beneficiaries that they would like to take care of on the death of the other.

140 The QTIP trust cannot be terminated until the survivor spouse dies.

B. QTIP trust is a “statutory animal” and has to follow a strict set of

regulations to qualify as such. The rules are as follows:

(i) Under Section 2056(b)(5), the first-to-die spouse is allowed full

marital deduction for a transfer in trust in which the surviving spouse (1) is

entitled for life to receive “all the income from the entire interest” or a “specific

portion thereof,” (2) has a general power of appointment over that trust property

to appoint the same to herself or her estate, and (3) in which no third party has the

power to appoint that trust interest to “any person other than the surviving spouse.

(ii) Under Section 2056(b)(7), the first-to-die spouse is allowed full

marital deduction for a transfer in trust if “qualified terminable interest property”

passes from the first-to-die spouse to the surviving spouse. To benefit from this

QTIP statute, the executor for the estate of the first-to-die spouse must make a

proper irrevocable election on the estate tax return to transfer QTIP property with

a “qualifying income interest for life” to the surviving spouse. A “qualifying

income interest for life” means (1) the surviving spouse must be entitled to all

income from the property no less than annually; and (2) that no person, not

even the surviving spouse, has power to appoint “any part of the property to

any person other than the surviving spouse” while the surviving spouse is alive.

C. As one can see, with the first statutory QTIP under 2056(b)(5), a certain amount of uncertainty exists if the first-to-die spouse wants to ensure that assets pass to

141 specific beneficiaries on his or her death. Such intent is easily disturbed or diverted by the

survivor’s exercise of the power to appoint assets as she or he sees fit. Therefore, the

second statutory QTIP under 2056(b)(7) is much more common in our practice.

D. There is a significant overlap in the Regulations under the Code that apply

to both types of QTIPs. Section 20.2056(b)-7(d)(2) of the Regs specifies that in

determining if a spouse is entitled to all the income from trust property, the rules

contained in § 20.2056(b)-5(f) apply. Under the aforementioned Regulations, any type of

asset can be put into a QTIP but surviving spouse has to have an enforceable right to

demand that the non-income producing property be converted into income-producing

property either by exchange or sale.2

E. Why are all these requirements imposed upon QTIPs? Technically, to

qualify for a marital deduction in the estate of the first-to-die spouse, the property has to

be distributed to the surviving spouse and that results in the deferral of the estate tax until

the death of the second spouse. For this “deferral” of estate tax to be allowed on the death

of the first-to-die spouse, a certain set of rules was created by the IRS to ensure that, if

the survivor is to receive property through a restricted mechanism such as a trust, he or

she still has substantial and ascertainable rights to the property. Therefore, the surviving

spouse must be the only beneficiary of the trust during his or her lifetime. Any

2 Section 20.2056(b)-5(f)(4) provides that a trustee’s power to retain assets that consist substantially of unproductive property will not disqualify the spouse’s lifetime income interest if the applicable rules for the trust administration require, or permit the spouse to require, that the trustee either make the property productive or convert it into productive property within a reasonable time. Section 20.2056(b)-5(f)(5) provides that the spouse will not be entitled to all the income from the trust if the trust is funded with substantially unproductive property and the spouse cannot compel the trustee to either make the property productive or convert the trust assets into productive property.

142 contingency that terminates the interest of the surviving spouse before death, such as

obtaining adequate source of income other than the QTIP, getting remarried, or winning a

lottery, disqualifies the entire trust for the marital deduction and triggers estate tax on the

death of the first-to-die spouse.

III. How are QTIP trusts structured? All QTIP trusts are created so that the surviving spouse receives the net income from the trust, but is not permitted to change the beneficiaries of the trust (no power to appoint the remainder).

A. What happens to the property in the QTIP? It is important to remember that

the QTIP statutory mechanism does not minimize estate taxes. It is only a deferral

mechanism until the death of the second spouse. Therefore, the entire QTIP remaining

on the death of the second-to-die spouse, is taxed on the value of the property when the

surviving spouse dies, if it exceeds the applicable exemption amount for the second-to-

die spouse’s estate. This is because the property is considered to “belong” to the

surviving spouse, and is, therefore, includable in the estate of the surviving spouse.

Hence, if the value of the property in the QTIP increases substantially over the years,

then more estate tax will have to be paid then would otherwise have been the case if the

property was distributed directly to the ultimate beneficiaries on the death of the first-to-

die spouse. Property in the QTIP trust is taxed at a marginal rate in the estate of the

second-to-die spouse (not pro rata). Therefore, if the estate of the second-to-die spouse is

fairly small and nontaxable (if it wasn’t for the inclusion of the QTIP remainder), the

QTIP would have to be allocated with all of the estate tax generated by its inclusion in

the estate of the second-to-die spouse. The assets of the QTIP, as includable in the estate

143 of the second-to-die spouse, receive a step up in basis on the death of the survivor spouse.

B. What is the mechanics of the QTIP Election? If a QTIP trust is created during lifetime, the grantor must make the election to treat the property as QTIP property on his federal gift tax return. If client wants to transfer property into a QTIP trust at his death, then the executor must make an election on the federal estate tax return. The executor has an option to either elect to QTIP the entirety of the property, to not list any property as the QTIP property or to make a partial QTIP election by specifying a certain percentage of the property be included in the QTIP trust. For the partial QTIP election, only the percentage of the property listed for QTIP treatment can be specified — not specific property. The percentage that is excluded will be added to the taxable estate of the decedent.

C. What is a reverse QTIP election? Under IRC §2652, the executor can also choose a so-called reverse QTIP election on the estate tax return, which can be made independently of the other elections, that allows the decedent to use his remaining exemption from the generation-skipping transfer tax (GSTT) for all or a part of the property in the QTIP trust whose final beneficiaries are in the skip generation with respect to the decedent. Since it is not uncommon for the grandparents to provide for their grandchildren, this often become a relevant planning issue. This is frequently done in

New York when credit shelter amount is limited to the remaining New York exemption amount so there is some GST exemption left over to apply to Marital Trust.

D. How does the reverse QTIP election work? The reverse QTIP election, when timely selected, serves to treat the first-to-die spouse as the grantor of the QTIPed property for the purposes of GSTT. Let’s break it down: when the first-to-die spouse dies

144 and creates a QTIP, the property that remains in the QTIP on the death of the surviving spouse is treated as if belonging to the surviving spouse. When the second-to-die spouse dies, the then-remaining QTIPed property is included in the estate of the second-to-die spouse, which makes the second-to-die spouse a “grantor” of the property for the GSTT purposes (even though the second-to-die spouse did not create the QTIP trust and never funded it with any property). The reverse QTIP election changes that re-characterization and the original first-to-die spouse is treated as the “grantor” of the QTIPed property with respect to a part or all of the property for which a reverse QTIP election was made on his or her death. This allows for the use of the first-to-die spouse's GSTT exemption for the

QTIPed property and preserves it, while also allowing the surviving spouse's GSTT exemption to be used for her other property. Without the reverse QTIP election, the first- to-die spouse’s GSTT otherwise-unused exemption that was available to him at his death would be lost. The reverse QTIP election can only apply to a separate QTIP trust, so if the amount qualifying for the marital deduction exceeds the GST exemption, then the

QTIPed property must be separated into two trusts – one QTIP trust that is fully GSTT exempt (zero inclusion ratio) and the other that is not GSTT exempt (inclusion ration equal to one).

E. What is a “Clayton QTIP”? A "Clayton Clause" stems from a case in which the

IRS argued that if the executor was allowed to determine how much and what kind of property funded a QTIP trust, then none of the property passing into the QTIP trust would qualify for the marital deduction. The clause allows any part of the marital gift not elected to qualify for the marital deduction to pass to another trust or to other beneficiaries without jeopardizing the entire marital deduction. In the seminal Clayton

145 decision, the Fifth Circuit rejected the argument by the IRS and allowed the deduction.

Other circuits have followed the Fifth Circuit's ruling.3 The IRS since then has also

conceded the issue in the Regulations.

IV. How to fund the QTIP? There are only two basic types of formulas used for funding marital distributions under an estate plan: (1) the pecuniary funding formula (which defines either the marital or the nonmarital share as a fixed dollar amount); and (2) the fractional funding formula (which uses a fraction to determine the marital and nonmarital shares). The remainder of the estate after fulfilling the pecuniary gift is used to fund the other share, whether marital or nonmarital.

A. Marital Pecuniary Formula. The marital pecuniary formula sets up for the least

amount to result in zero estate tax at the first death to pass to the Marital Trust and the

remainder to the CST. Once the amount of the marital pecuniary bequest is known, the

executor or trustee allocates assets equal to this amount to the marital share. The value of

the marital share does not change between the date of death and the date of distribution.

Accordingly, appreciation or depreciation in the post-death values of the estate are

allocated to the residue.

B. Marital Fractional Formula. The second basic formula used for marital funding

is the fractional share formula. The fractional share formula sets up a fraction equal to the

value of assets being transferred to the Marital Trust, where the numerator is equal to the

amount of the marital deduction sought, and the denominator is the value of the total

assets available for funding. Usually such formula defines the numerator as the amount of

3 Estate of Clayton v. Comm., 976 F2d 1486 (CA 5 1992). 146 marital deduction available less the total value of property passing to the survivor by

operation of law (outside of probate) that qualify for the marital deduction. The

denominator is the date of death value of assets available for funding determined either

before or after payment of the residuary expenses (either the gross estate or the net

estate).4

V. Examples of drafting QTIP clauses in Wills:

QTIP/CST:

Article ___ Disposition of Remaining Trust Estate if Spouse Survives

If the Grantor's [husband/wife], [SPOUSE], survives the Grantor:

The Grantor directs that the remaining property of the Trust Estate (meaning thereby the balance of the Trust Estate after payment of expenses and the disposition of property pursuant to the prior provisions of this Agreement, but before deducting any estate or other death taxes, the "Remaining Trust Estate"), shall be divided into two shares, hereinafter referred to as the "Credit Shelter Share" and the "Marital Share."

The Credit Shelter Share shall be that fraction of the Remaining Trust Estate, the numerator of which shall be the "credit absorbing amount," described in Article __ (See “Credit Absorbing Amount”) below, and the denominator of which shall be the value of the Remaining Trust Estate. The Marital Share shall be the balance of the Remaining Trust Estate. In valuing assets for the purpose of computing the above fractions, the amounts determined for Federal estate tax purposes shall be used. Article ___ Disposition of the Marital Share

The Marital Share shall be disposed of as follows:

A. That fraction of the Marital Share, the numerator of which shall be the unused portion of the Grantor's generation skipping transfer tax exemption at the time of the Grantor's death pursuant

4 The other factor in computing the fraction is whether administrative expenses are taken on the Form 706 or the Form 1041 but this discussion is not within the scope of this lecture.

147 to Sections 2631 and 2632 of the Code, less the value of the Credit Shelter Share, and less the value as determined for Federal estate tax purposes of any assets passing at the time of the Grantor's death, under the provisions of this Agreement or outside of this Agreement, which would be considered "direct skips" under Section 2612(c) of the Code and the denominator of which shall be the value of the Marital Share, shall be known as Trust A of the Marital Share. The balance of the Marital Share shall be known as Trust B of the Marital Share. The Trustees shall hold both Trust A and Trust B of the Marital Share on the following terms and conditions:

The Trustees shall pay to the Grantor's [husband/wife], [SPOUSE], all the net income of the trusts, or apply it to the Grantor's [husband/wife]'s use, at least annually. The Trustees shall also pay to the Grantor's [husband/wife] or apply to the Grantor's [husband/wife]'s use so much of the principal of the trusts (including the whole thereof) as may be required from time to time for the Grantor's [husband/wife]'s reasonable support and maintenance, in the condition to which the Grantor's [husband/wife] has been accustomed, after taking into account the Grantor's [husband/wife]'s income from other sources. In addition, the Trustees shall pay to the Grantor's [husband/wife] such amounts of the principal of the trusts as the Grantor's [husband/wife] shall request not exceeding in any calendar year five (5%) percent of the value of the principal of the trusts. The total amount that may be withdrawn by the Grantor's [husband/wife] shall not be cumulative. In addition, the Grantor authorizes the Trustees at any time to pay to the Grantor's [husband/wife] such further amounts of the principal of the trusts (including the whole thereof) as they may in their absolute and unreviewable discretion determine.

B. Upon the Grantor's [husband/wife]'s death, any undistributed income of both of the Marital Share trusts shall be paid to the Grantor's [husband/wife]'s estate. Any estate, inheritance, or other death taxes imposed by reason of inclusion of Trusts A and B in the Grantor's [husband/wife]'s estate shall be paid, to the extent possible, from the principal of Trust B. The remaining principal of Trust A and Trust B shall be paid to such of the Grantor's descendants, outright, or in trust, as the Grantor's [husband/wife] shall by Will (or by a provision of a revocable inter vivos trust created the Grantor's [husband/wife], which trust shall, by its terms, become irrevocable upon the Grantor's

148 [husband/wife]'s death) appoint by specific reference to the power herein granted. Any remaining principal of the Marital Share trusts shall be divided into separate shares for the Grantor's then living issue per stirpes. Each such share shall be held, administered and distributed separately in accordance with the provisions of Paragraph B of Article ______.

C. To the extent so elected by the Grantor's fiduciaries, it is the Grantor's intention that the property passing to the trusts of the Marital Share shall be treated as "qualified terminable interest property" under Section 2056(b)(7) of the Code, that the Grantor's estate shall be entitled to the resulting marital deduction allowable in determining the Federal estate tax payable by reason of the Grantor's death, and that this Agreement shall in all of its provisions be interpreted so as to effect this. In pursuance of this end, the Grantor directs that:

1. Only assets which qualify for the marital deduction shall be allotted to the Marital Share, and no property subject to any estate or other death taxes in any foreign country shall be allotted to the Marital Share except to the extent necessary to fund it in full.

2. The Grantor's fiduciaries shall have no power, authority, immunity or discretion in respect of the Grantor's estate or the trusts of the Marital Share if or to the extent that the existence or exercise of any such power, authority, immunity or discretion would result in eliminating or diminishing the marital deduction to which the Grantor's estate would otherwise be entitled.

3. If at any time any property that is not fully productive (including uninvested funds) shall be part of the trusts of the Marital Share, the Trustees, when so directed by the Grantor's [husband/wife], shall within a reasonable time make such property productive or convert it by sale or otherwise to productive property.

D. If the Grantor's fiduciaries or any other person shall have made or shall be permitted or required to make any election, whether before or after the Grantor's death, under Section 2056 of the Code affecting Federal estate or other death taxes in the Grantor's estate, or in the estate of the Grantor's [husband/wife], the persons or fiduciaries making or declining to make such election shall be under no obligation to any person, or to the Grantor's estate, as a result of the making of or failure to make

149 such election, and no adjustments shall be made on account of estate tax or income tax liabilities increased or decreased as a result of the making of or failure to make any such election, as between the persons interested in the Credit Shelter Share and the persons interested in the Marital Share.

Credit Absorbing Amount

A. It is the Grantor's intention to take full advantage of the applicable or unified estate and gift tax credits available to the Grantor's estate for Federal estate tax purposes [(but only to the extent that the use of these credits does not require the payment of state death taxes, which would otherwise not have to be paid)], and that the value of the Grantor's taxable estate plus the value of the Grantor's adjusted taxable gifts for Federal estate tax purposes will utilize said credits in full [to the extent that said credits do not require payment of state death taxes which would otherwise not have been paid]. Accordingly, the words "credit absorbing amount," as used in Article ______, hereof, shall mean:

1. the maximum amount passing free of [State and] Federal estate tax as of the time of the Grantor's death by reason of the application of the applicable or unified credit under Section 2010 of the Code, plus

2. an amount which will pass free of Federal estate tax at the time of the Grantor's death after application of Section 2001(b)(2) of the Code, plus

3. an amount which will pass free of Federal estate tax by reason of the credit under Section 2012 of the Code for gift tax paid on gifts included in the Grantor's gross estate, minus

4. the value as determined for Federal estate tax purposes of all assets included in the Grantor's gross estate that pass or have passed under the provisions of this Agreement or by insurance or otherwise and for which no deduction is allowed for Federal estate tax purposes, minus

5. the value of the Grantor's adjusted taxable gifts (if any), and minus

150 6. the charges to the principal of the Grantor's estate that are not allowed as deductions for Federal estate tax purposes.

[Anything herein this paragraph A to the contrary notwithstanding, the credits specified in the prior provisions of this paragraph A shall only be applied to the extent that these credits do not require the payment of state death taxes which would otherwise not have been paid.]

QTIP/No-CST

Disposition of Remaining Trust Estate if Spouse Survives

If the Grantor's [husband/wife], [SPOUSE], survives the Grantor:

A. The Grantor directs that the remaining property of the Trust Estate (meaning thereby the balance of the Trust Estate after payment of expenses and the disposition of property pursuant to the prior provisions of this Agreement, but before deducting any estate or other death taxes, the "Remaining Trust Estate"), shall be known as the Marital Share and shall be administered as follows:

1. That fraction of the Marital Share, the numerator of which shall be the unused portion of the Grantor's generation skipping transfer tax exemption at the time of the Grantor's death pursuant to Sections 2631 and 2632 of the Code, less the value as determined for Federal estate tax purposes of any assets passing at the time of the Grantor's death, under the provisions of this Agreement or outside of this Agreement, which would be considered "direct skips" under Section 2612(c) of the Code and the denominator of which shall be the value of the Marital Share, shall be known as Trust A of the Marital Share.

2. The balance of the Marital Share shall be known as Trust B of the Marital Share. The Trustees shall hold both Trust A and Trust B of the Marital Share IN TRUST to be administered in accordance with paragraph B of this Article.

B. The Trustees shall pay to the Grantor's [husband/wife], [SPOUSE], all the net income of the trusts, or apply it to the Grantor's [husband/wife]'s use, at least annually. The Trustees shall also pay to the Grantor's [husband/wife] or apply to the Grantor's [husband/wife]'s use so much of the principal of the trusts (including the whole thereof) as may be

151 required from time to time for the Grantor's [husband/wife]'s reasonable support and maintenance, in the condition to which the Grantor's [husband/wife] has been accustomed, after taking into account the Grantor's [husband/wife]'s income from other sources. In addition, the Trustees shall pay to the Grantor's [husband/wife] such amounts of the principal of the trusts as the Grantor's [husband/wife] shall request not exceeding in any calendar year five (5%) percent of the value of the principal of the trusts. The total amount that may be withdrawn by the Grantor's [husband/wife] shall not be cumulative. In addition, the Grantor authorizes the Trustees at any time to pay to the Grantor's [husband/wife] such further amounts of the principal of the trusts (including the whole thereof) as they may in their absolute and unreviewable discretion determine.

1. Upon the Grantor's [husband/wife]'s death, any undistributed income of both of the Marital Share trusts shall be paid to the Grantor's [husband/wife]'s estate. Any estate, inheritance, or other death taxes imposed by reason of inclusion of Trusts A and B in the Grantor's [husband/wife]'s estate shall be paid, to the extent possible, from the principal of Trust B. The remaining principal of Trust A and Trust B shall be paid to such of the Grantor's descendants, outright, or in trust, as the Grantor's [husband/wife] shall by Will (or by a provision of a revocable inter vivos trust created the Grantor's [husband/wife], which trust shall, by its terms, become irrevocable upon the Grantor's [husband/wife]'s death and the assets of which shall be includable in the Grantor's [husband/wife]'s gross estate for Federal estate tax purposes) appoint by specific reference to the power herein granted. Any remaining principal of the Marital Share trusts shall be administered in accordance with the provisions of Article FIFTH of this instrument as if the Grantor had then died, surviving the Grantor’s said [husband/wife] and as if the Remaining Trust Estate consisted only of such property.

2. To the extent so elected by the Grantor's fiduciaries, it is the Grantor's intention that the property passing to the trusts of the Marital Share shall be treated as "qualified terminable interest property" under Section 2056(b)(7) of the Code, that the Grantor's estate shall be entitled to the resulting marital deduction allowable in determining the Federal estate tax payable by reason of the Grantor's death, and that this Agreement shall in all of its provisions be interpreted so as to effect this. In pursuance of this end, the Grantor directs that:

(a) Only assets which qualify for the marital deduction shall be allotted to the Marital Share, and no property subject to any estate

152 or other death taxes in any foreign country shall be allotted to the Marital Share except to the extent necessary to fund it in full.

(b) The Grantor's fiduciaries shall have no power, authority, immunity or discretion in respect of the Grantor's estate or the trusts of the Marital Share if or to the extent that the existence or exercise of any such power, authority, immunity or discretion would result in eliminating or diminishing the marital deduction to which the Grantor's estate would otherwise be entitled.

(c) If at any time any property that is not fully productive (including uninvested funds) shall be part of the trusts of the Marital Share, the Trustees, when so directed by the Grantor's [husband/wife], shall within a reasonable time make such property productive or convert it by sale or otherwise to productive property.

3. If the Grantor's fiduciaries or any other person shall have made or shall be permitted or required to make any election, whether before or after the Grantor's death, under Section 2056 of the Code affecting Federal estate or other death taxes in the Grantor's estate, or in the estate of the Grantor's [husband/wife], the persons or fiduciaries making or declining to make such election shall be under no obligation to any person, or to the Grantor's estate, as a result of the making of or failure to make such election, and no adjustments shall be made on account of estate tax or income tax liabilities increased or decreased as a result of the making of or failure to make any such election.

VI. Advantages of planning with QTIPs.

A. Certainty with respect to the final disposition of assets. QTIP trusts offer the

first-to-die spouse full control of the disposition of his or her property after the death of

the surviving spouse. QTIP trusts are often used for this purpose in cases of previously

married couples who have children from prior marriages.

153

B. The availability of GSTT planning. Reverse QTIP Election may be selected

with respect to all, part or none of the QTIPed property. Typically, a reverse QTIP

election is made to allow the first-to-die spouse to utilize a portion of the GST exemption

that otherwise might be lost.

C. Assets are not included in the probate estate of the surviving spouse. The

assets remaining in a QTIP trust on the death of the second-to-die spouse are not a part of

the probate estate of that spouse. Said assets should also not be subject to the claims of

the surviving spouse’s creditors, including in case of a divorce from any succeeding

marriage of the surviving spouse.

D. Flexibility of the post-death elections. In certain situations, it may be more

advantageous to decline to make the QTIP election. In other situations, making a partial

QTIP election, which is permissible, may be more advantageous. A QTIP trust allows the

executor of the first-to-die spouse to make that decision after the death of the first spouse

depending on the circumstances and the tax laws at such time.

VII. Disadvantages of planning with QTIPs:

A. Lack of control by the surviving spouse and inability to plan with the QTIP

funds. QTIPs are most often drafted to restrict the surviving spouse’s ability to “divert”

assets to anyone other than the first-to-die spouse’s intended ultimate beneficiaries. Due

to the surviving spouse’s lack of invasion powers, he or she may not be able to obtain

from the QTIP trust the necessary funds to make inter-vivos gifts to the next generation.

This is not a concern if the surviving spouse has access to other assets with which to fund

154 the gifts. This also less of an issue if the surviving spouse serves as trustee or trustee

(other than the surviving spouse) can distribute assets of the trust to the surviving spouse.

B. Conflicts Between Surviving Spouse and Remainder Beneficiaries. What may be perceived as a primary benefit of the QTIP trust, is also its inherent disadvantage. It is difficult for the trustee to manage the expectations and the tension between the net income beneficiary, who is a surviving spouse, and the remainder beneficiaries, who are the children from the prior marriage of the decedent. The conflict arises in regard to almost every aspect of the QTIP trust’s administration – its investment strategy (net income production versus investment for long term growth), tax strategy, adequacy of accountings, and expenses allocation. If the size of the QTIP is significant, where possible, it may be wise to involve an independent corporate trustee to balance the interests and to manage the QTIP.

155 PART II. A CLOSER LOOK AT CREDIT SHELTER TRUSTS

I. Credit Shelter Trust is one of the most common trusts that is utilized in estate planning, and is typically (but not always) a testamentary trust as opposed to created during life. This type of trust is also commonly referred to as a so-called “By-Pass Trust”. Structuring and incorporating a credit shelter trust (“CST”) into clients’ estate plans starts with understanding two basic premises of transfer taxation:

1. Estate taxes are not imposed on assets of any amount

passing to a surviving spouse (when survivor spouse is US citizen), and

2. The exemption amount (or a dollar-for-dollar

corresponding tax credit amount) is an amount that is available at death to

each spouse to shelter from estate taxes irrespective of who is the

immediate or ultimate recipient of the “sheltered” assets. 5

II. How does it work?

A. Most often, upon death, (but sometimes created during lifetime) a certain

amount of Client’s assets, as specified in the Last Will and Testament or any

testamentary substitute document, such as a revocable trust, are transferred, estate-tax

free, to a trust for beneficiaries, other than a surviving spouse, which would normally

trigger an estate tax. Nonetheless, because the dispositive documents specify that

particular transfer is a transfer using the remaining credit shelter amount still available to

the client at death, that specific transfer is not taxed, even though the beneficiary does not

5 Beware of generation skipping transfer taxes implications and state inheritance taxes, which are not subject of this lecture.

156 have to be the surviving spouse. For example, if a husband and wife own assets valued at

$20,000,000, and $5,490,000 is directed into a credit shelter trust upon the death of the

husband, estate taxes will be avoided on the death of the husband (first-to-die spouse) and

the trust will be funded with $5,490,000 for the benefit of the husband’s children from

the first marriage (a transfer that would have otherwise been taxed). The beneficiaries of

the trust and the amount going into the trust cannot be changed after the death of the first

spouse. 6 $5,490,000 of the trust assets will pour outside of estates of the spouses, never

a subject to estate taxation. One can also allocate GST exemption to assets passing into

CST.

B. What about the surviving spouse? Would you ever make a surviving

spouse a beneficiary of the credit shelter trust? Under the basic premise #1 above, you

would not. But the answer is, as most often in our practice, – it depends. Most often, in a

case of a blended family where there are children from the first marriage, you would want

to completely separate the interests of the surviving second spouse and the children from

the first marriage. In the case where everyone “gets along”, making the surviving spouse

a discretionary beneficiary along with the children or grandchildren (a discretionary

income and/or principal beneficiary of the credit shelter trust, or a mandatory net income

beneficiary of a credit shelter trust) may be advantageous as it may offer additional

liquidity to the surviving spouse and may also offer additional planning opportunities for

the entire family during the surviving spouse’s lifetime and at her death. The distribution

determinations and power to invade trust corpus also greatly depends upon who acts as a

trustee of the GST.

6 With the exception of circumstances involving decanting or a court proceeding.

157 C. How much should go into a credit shelter trust? The answer is, again, it

depends. If you have clients with an estate that would be taxable on both Federal and

State levels (for example, New York State), it is something to think about. Sometimes it

makes sense to force a small amount of New York State estate tax and shelter a fully

available federal credit. That depends on many factors such as liquidity available to pay

said forced tax and on whether there is enough funds to go into the trust to its full Federal

potential. It may make sense to put only what is available to be sheltered both on Federal

and State levels and not pay tax altogether. Today, for a New York decedent, that amount

would be $4,187,500 and by 2019 New York estate tax exemption is schedule to become

equal to the Federal exemption. Let’s examine the mechanisms that would determine the

amount flowing into the credit shelter trust under the decedent’s Will or Rev trust as well

as various tax ramifications that follow the funding.

II. Should there still be CST planning in light of the availability of “portability”?

We’ve all heard about portability. Let’s take a closer look.

A. What is portability? At a first glance, a provision of the Tax Relief and Job

Creation Act of 2010 (the “Tax Relief Act”) might seem to have eliminated any necessity

of CST planning by creating a default provision in the law that accomplishes what estate

planners have done for years through careful planning and drafting. The law in 2010

created a way to ensure that the estate tax exclusion amount for the first-to-die spouse is

preserved and carried over to the surviving spouse and then, eventually, to the ultimate

beneficiaries. This is the so-called “portability.”

158 B. How does portability work? Internal Revenue Code Section 2010 was amended by the Tax Relief Act to provide that in the case of estates of decedents dying and gifts made after December 31, 2010, the “applicable exclusion amount” shall be equal to the sum of the “basic exclusion amount” and, in the case of a surviving spouse, the “deceased spousal unused exclusion amount”. The basic exclusion amount is set at $5 million, indexed for inflation for decedents dying on or after January 1, 2012. The “deceased spousal unused exclusion amount” is the lesser of (i) the basic exclusion amount, or (ii) the excess of the basic exclusion amount of the last predeceased spouse of such surviving spouse, over the amount with respect to which the tentative tax is determined under section 2001(b)(1) on the estate of such deceased spouse (meaning the last predeceased spouse’s available unused exclusion amount).

C. Should we simply rely on portability and what to do for smaller estates?

Estate planning advisers should never recommend full reliance upon portability. Rather, credit shelter trusts should continue to be used in estate planning. Why?

1. No protection of growth and no indexing for inflation of the

portability amount. The basic exclusion amount is indexed for inflation every

year but a first-to-die spouse’s unused exclusion amount is “frozen” in time as of

that spouse’s date of death. Thus, portability of the first-to-die spouse’s unused

exclusion amount cannot shelter issues of growth and cannot address issues of

inflation, which credit shelter trusts address by fully removing all of the

appreciation from the survivor’s estate and sheltering it from transfer taxes. The

potential downside of the GST planning is a loss of a step-up basis or the death of

159 the survivor spouse, which can be accomplished by distributing assets out of the

CST to the survivor before death, capital gains taxes on the sale of the property sheltered in the trust. Where the first-to-die spouse’s property has strong appreciation potential, the second-to-die spouse could end up with a taxable estate that a credit shelter trust could have avoided. Conversely, where there is little risk of the second-to-die spouse having a taxable estate, using portability may be advantageous since the value of property included in the second-to-die spouse’s estate would receive a step-up in basis upon her death, thereby potentially sheltering more of the property from future capital gains tax liability on sale. Even if we see laws change to index portability for inflation, such indexing would still shelter less than a credit shelter trust would because an inflation-indexed unused exclusion amount of the first-to-die spouse would most likely offer less “wing- span” to shelter property appreciation over time than would a well- invested portfolio in a credit shelter trust. That becomes more of a consideration especially if the surviving spouse significantly outlives the first-to-die spouse.

2. Only federal exclusion amount is portable. It is important to remember that some states still impose estate taxes and New York is one of them. To the extent that a first-to-die spouse has at least a portion of his or her basic exclusion amount equal to the state estate tax exemption, part or all of the first-to-die spouse’s state estate tax exemption will go unused if no planning is implemented and clients rely only on portability. Even couples who reside in states that do not have estate tax should think about this issue. The surviving spouse may move

160 and/or state transfer tax regimes, like the federal regime, might change. 7

3. The GST exemption is not portable. Portability of the first-to-die

spouse’s unused exemption amount is available only for the remaining estate tax

exclusion. The corresponding generation- skipping transfer (GST) tax exemption

amount, is not portable. Therefore, if clients rely on portability for federal estate

tax purposes, it could result in complete failure to preserve the client’s remaining

GST exemption. At the same time, when planning with a simple CST, if

distributions to skip generations from the CST are foreseeable and/or intended by

the client, the first-to-die spouse’s remaining GST exemption (or a portion

thereof) may be allocated to the assets passing into the CST at the time of the

first-to-die spouse’s death.8

4. Portability is not automatic and requires an affirmative action.

Portability occurs only if the executor of the estate of the deceased spouse makes

an election on the deceased spouse’s timely filed estate tax return. Therefore, you

have to rely upon someone actually taking an action in the estate of the first-to-die

spouse and doing it timely by filing form 706 with the IRS. What if the estate of

the first-to-die spouse is not required to file a federal estate tax return because it is

not large enough? This is problematic because it requires the first-to-die spouse’s

estate to incur an otherwise unnecessary cost of preparing and risk of filing a

7 As history shows it does happen: in 2009, Delaware enacted an estate tax with a $3.5 million exemption (Delaware House Bill 291); Illinois reinstated its estate tax with a $2 million exemption in 2011 (Illinois Public Act 96-1496); Hawaii enacted an estate tax with a $3.5 million exemption in 2010, (Act 74, Session Laws of Hawaii 2010).

8 Automatic allocation of the GSTT exemption is possible but it is full of traps, and inconsistencies and should not be relied upon. 161 federal estate tax return because filing the estate tax return is necessary to get portability, otherwise it is lost!

5. Portability does not add up in case of multiple predeceased spouses.

Section 2010(c)(4)(B) provides that “the term ‘deceased spousal unused exclusion amount’ means the lesser of the basic exclusion amount, or the excess of the basic exclusion amount of the last such deceased spouse of such surviving spouse, over the amount with respect to which the tentative tax is determined under section 2001(b)(1) on the estate of such deceased spouse”. Thus, only the estate tax exclusion of the immediately predeceased spouse of the surviving spouse is portable. With CST planning, this issue is avoided altogether. If a spouse remarries and outlives her second spouse, the CST created on the death of her first spouse still continues to preserve that first’ spouse’s unused estate and GST exemption.

6. Trusts offer advantages and planning outside of transfer tax savings.

Although portability may theoretically offer the same federal estate tax savings, planning with trusts opens doors to many valuable additional benefits such as asset protection, for example. No one is completely protected against potential creditor risk, especially anyone with substantial personal wealth. With portability, the inherited assets are fully reachable to all of the surviving spouse’s present and future creditors, as well as creditors in and, if the surviving spouse then , to the ex-spouse. Assets in CST can be protected from bankruptcy and divorce. Trusts can also provide professional money management and

162 intelligent distribution of the trust fund. Finally, a CST offers certainty and the

ultimate protection of the disposition of the assets at the termination of the trust

(most often, on the death of the surviving spouse). If relied upon portability, the

deceased spousal unused exemption amount is subject to the disposition by the

surviving spouse. This is most often a concern where spouses have children from

prior marriages or other family members who they would like to separately

provide for. The surviving spouse could easily benefit the beneficiaries of her

choice – for example, her children from the first marriage, - to the detriment of

the decedent’s children if there is no trust created on the death of the first-to-die

spouse, which will freeze the terms of the disposition on the death of the

surviving spouse.

III. How to structure a CST?

A. The credit shelter trust can be structured to require distributions of income

to the surviving spouse during his or her lifetime and can allow for the

discretionary distribution of principal, subject to the discretion of the trustee who

should be someone other than the surviving spouse. The amount allocated to the

trust can be determined by a formula set forth in a will or by the surviving spouse

by a disclaimer. Given the fluctuations in people’s net worth, liquidity

requirements, growth uncertainty and the unpredictable nature of tax policy,

funding a credit shelter trust through a disclaimer is an appealing and commonly

utilized approach.

163 B. Trust funding formulas: Pecuniary disposition vs. “formula” disposition. Clients’ plans may direct various forms of pecuniary (fixed-dollar amount) or fractional share formula clauses, which can have greatly varying funding and tax results. Most trusts that structure funding provisions around the use of the available estate tax exclusion amount contain a detailed formula for dividing the trust into the credit shelter trust and the Marital Trust. In general, there are two types of formulas, those that require one of the trusts to be funded with a pecuniary amount, and those that divide the trust assets on a fractional basis.

The formula or pecuniary clauses, and the planning that occurs in conjunction with administering them, has to take into the consideration that assets appreciate, depreciate or stay more or less stable in value. For example, assume you have a pecuniary bequest that requires distribution to the Credit Shelter Trust of assets in kind valued as of their date of distribution. Also assume you expect those assets to appreciate significantly in value after the death of the first spouse.

It makes sense to fund that bequest with assets in kind as soon as possible in order to (1) avoid significant capital gains realization between date of death and date of distribution values, and (2) to capture later asset appreciation free from estate taxation under the shield of the Credit Shelter Trust.

1. Pecuniary clauses: There are two types of pecuniary formulas:

"fixed sum" and "fairly representative."

164 (a) Fixed sum pecuniary formula. With the "fixed sum" pecuniary formula, the CST is funded with a fixed sum and the appreciation or depreciation of assets between the date of death and the date of funding funds to the trust that does not receive the pecuniary amount. If the assets used to fund the pecuniary share increase in value after the death of the first-to-die spouse and before the assets fund the trust, the trust will realize a taxable gain equal to the amount of the increase. The pecuniary formula, also known as a reverse pecuniary formula, usually defines the CST share of the estate as the maximum amount that can be allocated to the CST without generating any estate tax

(either State and Federal together or only State). The net residue of the estate is then sent into the Marital Trust. As stated before, this mechanism locks in the value of the CST, and any appreciation or depreciation in the value of the estate assets passes to the Marital Trust (or, if none, to any residuary beneficiary).

b. “Fairly representative” pecuniary formula. With the

"fairly representative" pecuniary formula, the pecuniary share need not be

(but may be) funded with a pro rata share of each asset. The pecuniary amount may be satisfied on a non-pro rata basis provided the funding is based on either the fair market value of the assets on the date of funding or in a manner that “fairly reflects the net appreciation or depreciation in the value of all the assets measured from the valuation date to the date of

165 funding”.9 If a fairly representative basis is used, and the assets appreciate

after the date of valuation, then the funding of the credit shelter trust will

include the pro rata share of net appreciation. If the values decline, then

this basis of funding of the CST will include the pro rata share of net

depreciation. If a fairly representative basis method is utilized and the

assets appreciate after the date of valuation, then the funding of the marital

and credit shelter shares will include the pro rata share of net appreciation.

If the values decline, then this basis of funding will include the pro rata

share of net depreciation. One of the benefits of the "fairly representative"

pecuniary formula is that there is no gain (and no tax liability) upon

funding the CST.

2. In addition, the estate planning practitioner can choose to fund either the

Credit Shelter Trust or the Marital Trust with the pecuniary amount and have the residue

of the estate pass into the other:

(i) Pre-residuary Marital Share: passes appreciation from date of death to the

CST. To illustrate the mechanism of the “residual” funding after a pecuniary amount is

directed into a marital trust, which we will discuss later, for an estate with (1) a date of

death value in 2016 of $7 million; (2) date of funding value of $8 million; (3) an estate

plan with a pecuniary marital funding formula,10 the Marital Trust is calculated to have a

value of $1,510.000 [$7 million date of death value less $5,490,000 applicable exclusion

amount for 2017], and the resulting amount passing to the CST is $6,490,000. All

9 Rev. Proc. 64-19, 1964-1 CB 682. 10 Assumptions for this hypothetical are that there were no prior lifetime gifts by the decedent and no administrative expenses were incurred in the estate. 166 appreciation on the value of the estate assets between the date of death and the date of funding ($1,000,000) is used to fund the CST, which is not taxed at the subsequent death of the surviving spouse. Note, however, if the same estate declined in value to $6 million on the date of funding, $1,510,000 would still be allocated to the Marital Trust, but only

$4,490,000 ($6 million less $1,510,000) would be available to fund the CST. Therefore, some practitioners worry about this method, particularly in large estates, because if the assets depreciate after death but before funding, which happens, the credit shelter trust that bears all of the depreciation could be entirely wiped out;

(ii) Preresiduary Pecuniary Non-Marital Gift. This approach uses the

applicable exclusion amount to fund the credit shelter trust or other - non-marital -

deduction bequest with a pecuniary amount, with the residue passing to the

marital share.

3. Fractional Share Formula Clauses. If a fractional share formula is selected, the trust property is allocated on a percentage basis between the marital share and the credit shelter trust. If fractional share formulas are used, there is no need to choose between the preresiduary and residuary marital clauses. The formula allocates an undivided interest in each asset to each trust. All growth will be allocated proportionately under the fractional formula, and no growth shifting occurs. In addition, because no pecuniary amount is to be funded, gain will not be realized upon the funding of the separate trusts.

C. What happens to the property in the credit shelter trust after its funding? The trust is funded on the death of the first-to-die spouse. The assets funding

167 the trust receive a step-up in basis, which is equal to the value of the assets as of the date

of death of the first-to-die spouse. All of the appreciation on the assets that comes into

effect between the death of the first-to-die and the second-to-die spouses is outside of the

estates of both spouses and, therefore, gets effectively sheltered from any transfer

taxation. 11

IV. Examples of drafting CST clauses in Wills:

Article ___: If my [husband/wife], [SPOUSE], survives me: I direct that my (meaning thereby all the rest of my property passing under my Will after debts, funeral and administration expenses but before deducting any estate or other death taxes) shall be divided into two shares, hereinafter referred to as the “Credit Shelter Share” and the “Marital Share.”

The Credit Shelter Share shall be that fraction of my Residuary Estate, the numerator of which shall be the “credit-absorbing amount,” described in Article TENTH below, and the denominator of which shall be the value of my Residuary Estate. The Marital Share shall be the balance of my Residuary Estate. In valuing assets for the purpose of computing the above fractions, the amounts determined for Federal estate tax purposes shall be used.

Article ____: Disposition of Credit Shelter Share and Dynasty Trust for Descendants I give the Credit Shelter Share to my Trustees, to be held and administered upon the following terms and conditions:

My Trustees may pay so much or all of the income and such amounts of the principal of the trust (including the whole thereof) to or for the benefit of my [husband/wife] [and such one or more of my issue living from time to time], as my Trustees shall in their absolute and unreviewable discretion determine and accumulate the balance of the income, if any, and add the same to principal. Upon the death of my [husband/wife], my Trustees shall divide the remaining property in the trust into separate trusts for my then

11 Beware of the GSTT implications, as well as capital gains taxes, both of which are outside the scope of this lecture.

168 living issue, per stirpes. Each such trust shall be held, administered and distributed in accordance with the provisions of paragraph B of this Article.

My Trustees may pay to or for the benefit of such one or more members of the class consisting of the descendant of mine in respect of whom the trust was established and such descendant’s issue living from time to time such amounts of the income and principal of the trust (including the whole thereof) as the Trustees shall in their absolute and unreviewable discretion determine and shall accumulate the balance of income, if any, and add the same to principal. [Additionally, the Trustees may pay any amounts of the gross income of such trust to such , contributions to which are tax deductible for Federal income tax purposes, as the Trustees in their discretion may choose by unanimous decision.] Upon the death of the descendant in respect of whom the trust was established, the remaining property in the trust shall be paid to those persons other than such descendant, his or her estate, his or her creditors or the creditors of his or her estate, outright or in trust, as such descendant shall by his or her Will (or by a provision of a revocable inter vivos trust created by such descendant, which trust shall, by its terms, become irrevocable upon such descendant’s death) appoint by specific reference to the power herein granted. Any property not so appointed shall be divided into separate trusts for such descendant’s then living issue, per stirpes, or if none, into separate trusts for the then living issue, per stirpes, of the nearest lineal ancestor of such descendant who has living issue, which nearest lineal ancestor must be me or my descendant. Each such trust shall be held and administered in accordance with the provisions of this paragraph B of Article THIRD of my Will.

V. What is a disclaimer trust and when would you use one? The disclaimer trust is a common but somewhat unreliable mechanism of estate planning, sometimes used as an alternative to funding a CST trust with a marital deduction formula in order to utilize a decedent’s applicable exclusion amount. When using a disclaimer, a trust is not mandated by the operation of the dispositive document but, rather, a surviving spouse may choose to disclaim property received from the decedent into a trust depending on his or her circumstances.

169 170

DEMYSTIFYING GRANTOR TRUSTS

by

Audrey Patrone Peartree, Esq.

and

Megan F. Barkley, Esq.

Harris Beach PLLC Pittsford

171

172 I. OVERVIEW OF GRANTOR TRUSTS

A. Historical Background

Setting the Stage

In the aftermath of the Great Depression and World War II, married couples were not permitted to file joint returns and income tax rates were upwards of 80%. Soaring income tax rates encouraged taxpayers to shift income to other taxpayers in lower income tax brackets, such as a spouse. In addition, taxpayers shifted income to trusts and trust beneficiaries.

Landmark Decision: Helvering v. Clifford, 309 U.S. 331 (1940)

In Helvering, a taxpayer funded a trust for the benefit of his wife but retained the discretion to make distributions to her. The taxpayer also retained other powers over the trust assets, including the power to vote the shares of stock transferred to the trust. The trust was to terminate at the end of five years, when the accrued income was to be paid to the wife and the principal returned to the taxpayer. The Court held that the taxpayer was the owner of the trust and that income earned in the trust would be taxed to the taxpayer. In reaching its decision, the Court noted “the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent continued to be the owner”.

“Clifford Regulations”

Adopted in 1946 in response to Helvering v. Clifford, the Clifford regulations provided guidelines for when trust income would be taxed to the grantor, and for when the trust would be deemed a separate taxpayer from the grantor.

Congress Acts

In 1954, Congress adopted the grantor trust provisions in Subpart E of Subchapter J of the Internal Revenue Code (i.e., IRC §§ 671 – 679)1, which effectively formalized the Clifford regulations. However, Subpart E does differ in some respects from the Clifford Regulations.

Tax Reform Act of 1986

The Tax Reform Act flattened individual tax brackets and eliminated the incentive to split income among taxpayers. In addition, lower tax brackets for trusts were all but eliminated. Diverting income from taxpayers with substantial income to trusts and trust beneficiaries no longer achieved the significant income tax savings obtained in the past. Taxpayers began invoking the grantor trust rules so that the grantor would be treated as owning the trust for income tax purposes.

1 Unless otherwise noted, “Code” and “IRC” refer to the Internal Revenue Code of 1986 and “Regulations” and “Reg.” refer to the Treasury Regulations promulgated thereunder.

173 B. What is a Grantor Trust?

A Symbiotic Relationship

Most trusts are treated as separate entities for federal income tax purposes, and are subject to the same progressive tax rates applicable to individuals. Trusts, however, have much “skinnier” tax brackets. For instance, in 2017, a trust with taxable income in excess of $12,500 is in the 39.6% tax bracket. In contrast, a married couple does not reach the 39.6% tax bracket until they have taxable income in excess of $470,700. See Rev. Proc. 2016-55.

Grantor trusts are not treated as separate taxpayers. Rather, the income generated from a grantor trust is taxed to the grantor (or, in some cases, another individual) because he or she has retained some interest in or control over the trust’s assets.

Because federal income tax laws view the grantor and the grantor trust as the same taxpayer, the tax elections and opportunities available to the grantor should be available to the trust. The grantor can take into consideration all of the trust’s tax items (e.g., income, deductions, and credits) “to which he [or she] would have been entitled had the trust not been in existence during the period he [or she] is treated as owner.” Reg. § 1.671-3(a)(1). Likewise, transactions between the grantor and the trust are disregarded because the transactions are deemed to be occurring between the same taxpayer.

Subpart E: IRC §§ 671 – 679

IRC § 671 provides, in part, that:

there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that potion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual.

C. Why Use a Grantor Trust?

Grantor trusts can be used to enhance many estate planning strategies resulting in assets passing to intended beneficiaries with little or no gift or estate tax. A trust is a grantor for income tax purposes when a grantor transfers assets to a trust but retains one or more powers listed in IRC §§ 671-677. Such transfers are treated for income tax purposes as a nonevent, since the grantor is required to pay all income taxes on the trust income as if the trust assets belonged to him. Since the payment of the income tax liability by the grantor is not a gift to the beneficiary, the grantor is permitted to reduce his taxable estate by the amount of the income taxes paid without incurring gift tax liability. Rev. Rule 2004-64. A grantor trust also can facilitate the purchase or exchange of low basis assets in exchange for higher basis assets, such as cash, by the grantor shortly before death without the imposition of an income tax. Since the low basis assets will be included in the grantor’s estate, they will acquire a new basis equal to estate tax values. IRC § 1014(a). If a grantor is treated as the owner of a trust’s income but not its corpus (see “Portion

174 Rule” in § II Part D), it may be possible to avoid state income tax on trust receipts allocable to corpus (e.g., capital gains). 2

II. BASIC RULES GOVERNING GRANTOR TRUSTS

IRC §§ 673 through 677 set forth certain powers that make the grantor (or another person) the deemed owner of all or a portion of a trust. However, in order to understand how these powers should be used to create a grantor trust (or to avoid creating a grantor trust), it is necessary to be familiar with the types of individuals who may hold the powers or block the exercise of the powers. These definitions and rules are found in IRC §§ 671 and 672 and the Regulations thereunder.

A. Who is a Grantor?

Definition

“[A] grantor includes any person to the extent such person either creates a trust, or directly or indirectly makes a gratuitous transfer . . . of property to the trust.” If a person establishes or funds a trust on behalf of someone else, both individuals are treated as grantors. If a person establishes a trust but does not make gratuitous transfers, that person is not treated as the grantor. Reg. § 1.671-2(e)(1).

Examples of Grantors:

Moore v. Commissioner, 23 T.C. 534 (1954)

A state court order created a trust to hold the residue of the decedent’s estate, and the residual beneficiaries consented to the establishment of the trust. The Tax Court found that each beneficiary was a grantor with respect to his or her interest in the trust.

Reg. § 1.671-2(e)

A creates and funds trust T for the benefit of A’s children. B makes a gratuitous transfer to T. Both A and B are grantors of T.

A creates trust T for his brother B’s benefit. A transfers $50,000 to T. The trustee invests the $50,000 in Company X’s stock. B’s uncle, C, sells property with a fair market value of $1,000,000 to T in exchange for the stock when it has appreciated to a fair market value of $100,000. Under Reg. § 1.671-2(e)(2)(ii), the $900,000 excess is a gratuitous transfer by C. So, A is a grantor with respect to the portion valued at $100,000, and C is a grantor with respect to the portion valued at $900,000. In addition, A or C or both will be treated as the owners of the respective portions of the trust of

2 See, e.g., New York Tax Law § 605(b)(3)(D), which provides that a New York resident trust with no New York tangible personal or real property, no New York source income, and no New York trustees will not be subject to New York State income tax.

175 which each person is a grantor if A or C or both retain power over or interest in such portions under IRC §§ 673 through 677.

However, a person who creates a trust but makes no gratuitous transfers to the trust, is a grantor of the trust but is not treated as an owner of any portion of the trust.

A, an attorney, creates a foreign trust, FT, on behalf of A’s client, B, and transfers $100 to FT out of A’s funds. A is reimbursed by B for the $100 transferred to FT. Both A and B are treated as grantors of FT. In addition, B is treated as the owner of the entire trust. Both A and B are responsible parties for purposes of reporting requirements under § 6048.

B. Who are Adverse Parties and Non-Adverse Parties?

An adverse party is “[a]ny person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he [or she] possesses respecting the trust”. In order for a party to be an adverse party, he or she must have a beneficial interest in a trust. A person who holds a general power of appointment over trust property is deemed to have a beneficial interest in the trust. IRC § 672(a). A trustee is not an adverse party merely because of his or her role as trustee.

An interest is “substantial” if “its value in relation to the total value of the property subject to the power is not insignificant.” Reg. § 1.672(a)-1(a) (emphasis added). Although the regulations provide that income beneficiaries can be deemed adverse parties, there is no definite threshold for having a not insignificant interest. Having a substantial beneficial interest does not automatically render a person an adverse party. Rather, to be an adverse party, the substantial beneficial interest must be adversely affected by the exercise or non-exercise of a power over the trust.

A party may be an adverse party with respect to the exercise or nonexercise of a power over a portion of a trust.

A, B, C and D are equal income beneficiaries of a trust and the grantor can revoke the trust with A’s consent. The grantor is treated as owner of a portion which equals three fourths of the trust. The grantor is not treated as owner of the portion which represents one-fourth of the trust. A is an income beneficiary as to one fourth of the trust, and his beneficial interest in the trust would be adversely affected by consenting to the grantor’s revocation of the trust. Reg. § 1.672(a)-1(b).

A non-adverse party is anyone who is not an adverse party.

C. Who are Related or Subordinate Parties?

The term “related or subordinate” party means any non-adverse party who holds one of the following relationships with the grantor:

176

(1) the grantor’s spouse; (2) the grantor’s parent; (3) the grantor’s issue; (4) the grantor’s sibling; (5) the grantor’s employee; (6) a corporation in which either or both the grantor and the trust have “significant” voting power (i.e., a “controlled corporation”); (7) an employee of a controlled corporation; or (8) an employee of a corporation in which the grantor is an executive.

The term “related or subordinate” party does not include the persons who have the following relationship with the grantor: niece, nephew, grandparent, spouse of children, spouse of grandchildren, partner, attorney, accountant, and financial advisor.

In some cases, powers and actions of a “related or subordinate” party will be imputed to the grantor only if the related or subordinate party is subservient to the grantor with respect to the exercise or non-exercise of a power. A related or subordinate party is presumed subservient only for purposes of the powers under IRC §§ 672(f), 674 and 675.

IRC § 672(e) provides that for purposes of Subpart E, a grantor is treated as holding any power or interest held by his or her spouse.

D. The “Portion Rule”

When a grantor is deemed the owner of any portion of the trust, the grantor must include the income, deductions, and credits against tax from that portion when computing his or her taxable income. IRC § 671. The term “portion” is not defined in the Code or Regulations. However, Reg. § 1.671-3(a) identifies the ways in which a grantor (or other person) may be treated as owning a portion of a trust.

Grantor is treated as owner of the entire trust. For instance, where the grantor retains a power to revoke a trust, he will be treated as owner of the entire trust. See IRC § 676.

Grantor is treated as owner of all items attributable to specific trust property. A grantor (or other person) who holds a power described in IRC §§ 673-679 over a specific trust asset and its income will be treated as owner of the specific trust asset and taxable on all items of income, deduction and credit attributable to the assets.

Grantor is treated as owner of ordinary income portion of trust. For instance if a grantor creates an irrevocable trust directing that ordinary income is payable to him for life and that upon his death the corpus is payable to B, an unrelated person, the grantor will be treated as owner of the ordinary income portion of the trust for income tax purposes. Similarly, if a grantor retains a right to allocate income between or among non-charitable beneficiaries, with principal to pass to a certain beneficiary upon grantor’s death, the grantor’s power to allocate income results in him being treated as owner of the income of the trust under IRC § 674(a).

177

Grantor is treated as owner of corpus. If a grantor is treated as owner with respect to only the corpus of a trust, the grantor must take into account the items of the trust’s taxable income that are allocated to corpus in computing his income tax liability (i.e., capital gains and losses).

Grantor is treated as owner of a fractional share of items of trust income and/or principal. If the portion of a trust treated as owned by a grantor consists of an undivided fractional interest in the trust, or of an interest represented by a dollar amount, the grantor is required to take into account that fractional share of the trust’s items of income, deduction and credit.

III. POWERS TRIGGERING GRANTOR TRUST STATUS

Subpart E sets forth the powers that will render the grantor (or another person) the owner of all or a portion of the trust for income tax purposes. Each power described includes a discussion of the whether the power creates a grantor trust and whether that power triggers inclusion in the grantor’s gross estate.

A. Reversionary Interests: IRC § 673

What is a ?

A reversion is a power to reclaim the possession or enjoyment of the trust property.

If the grantor retains a reversionary interest in any portion of the trust income or principal, he or she will be deemed the owner of that portion of the trust so long as the value of the reversion is greater than 5% of the value of the portion of the trust to which the reversion relates. IRC § 673(a). Drafters seeking to avoid invoking grantor trust status should ensure that the grantor holds no reversionary interest or that the value of the reversion is no more than 5% of the value of the trust portion of the trust to which the reversion relates.

Exception – IRC § 673(b)

The grantor is not treated as the owner if:

The beneficiary of the trust is a lineal descendant of the grantor;

The beneficiary holds all of the present interests in any portion of the trust; and

The grantor’s reversion takes effect upon the beneficiary’s death if the beneficiary dies before reaching age 21.

Estate Tax Consequences

In general, if a reversionary interest triggers grantor trust status, the trust will be included in the grantor’s gross estate. IRC § 2037.

178 Survivorship and Reversion Tests: IRC §§ 2037(a)(1) and 2037(a)(2)

Estate tax inclusion of the trust assets in the grantor’s estate will occur if both the survivorship test and the reversion test are met.

To meet the survivorship test, a beneficiary must survive the grantor in order to obtain the possession or enjoyment of the trust property at issue. The survivorship test will not be met if the beneficiary can take ownership by any other means.

To meet the reversion test, a grantor must retain a reversionary interest in the property at issue, and the value of the reversion immediately before the grantor’s death must exceed 5% of the value of the transferred property. The mortality tables and actuarial principles set forth in Reg. § 20.2037-1(c)(3) are used to determine the value of the reversion.

Example:

A decedent transferred property in trust with the income payable to his wife for her life and, upon her death, the remainder to the decedent’s then surviving children or, if none, to the decedent or his estate. No part of this property is includible in the decedent’s gross estate, regardless of the value of his reversionary interest, because each beneficiary can possess or enjoy the property without surviving the decedent. Reg. § 20.2037-1.

B. The Grantor’s Power to Control Beneficial Enjoyment: IRC § 674

Grantor trust status will be triggered if the beneficial enjoyment of the trust property is subject to a power of disposition exercisable by the grantor, a non-adverse party, or both, without the approval or consent of an adverse party.

A grantor will be deemed the owner of any portion of a trust where the beneficial enjoyment of the principal or income is subject to any power of disposition that either the grantor or a non- adverse party (or both) can exercise without an adverse party’s consent or approval.

Exceptions:

§ 674 contains a number of exceptions to this rule. The exceptions can be categorized into three groups: (1) powers held by anyone; (2) powers held by independent trustees; and (3) powers held by trustees other than the grantor or the grantor’s spouse.

1. Powers Held by Anyone

The following powers that affect beneficial enjoyment will not invoke grantor trust status, even if the powers are held by the grantor, an adverse party, a non-adverse party, a related or subordinate party, someone else, or a combination of the foregoing. IRC §§674(b)(1)-(8) and Reg. §§ 1.674(b)-1(b)(1)-(8).

179 • Power to Apply Income to Support a Dependent

A trust will not be deemed a grantor trust merely because someone (other than the grantor who is not acting as a trustee) holds a discretionary power to pay income for the support of a beneficiary whom the grantor is legally obligated to support (e.g., minor child). However, if the power is exercised, the grantor may be taxed on the income used for the beneficiary’s support. IRC § 674(b)(1) and Reg. § 1.674(b)-1(b)(1).

• Powers Affecting Beneficial Enjoyment Only After a Period

The grantor is not deemed to own any portion of a trust that is subject to a power to affect the beneficial enjoyment of the income received after the occurrence of some event so long as the power would not invoke ownership under IRC § 673 if the power were a reversionary interest. IRC § 674(b)(2) and Reg. § 1.674(b)-1(b)(2).

• Powers Exercisable by Will

In general, where the power to affect the beneficial enjoyment of trust property is exercisable only by will, the grantor will not be considered the owner of the trust. However, this exception does not apply if the grantor reserves in himself or herself the power to appoint trust income accumulated for disposition under the grantor’s will. IRC § 674(b)(3) and Reg. § 1.674(b)-1(b)(3).

• Power to Choose Charitable Beneficiaries

A trust is not a grantor trust if the grantor retains only the power to allocate trust corpus or income to charitable organizations or an plan. IRC § 674(b)(4) and Reg. § 1.674(b)-1(b)(4).

• Power to Distribute Principal

The grantor will not be treated as the owner if he or she has the power to distribute trust principal to an identified beneficiary or among a class of beneficiaries, so long as the power is limited by a “reasonably definite standard”. IRC § 674(b)(5) and Reg. §1.674(b)-1(b)(5).

A “reasonably definite standard” is “[a] clearly measurable standard under which the holder of a power is legally accountable”. Reg. § 1.674(b)(1)-(1(b)(5)(i). For example, principal distributions for “reasonable support and comfort” will qualify as being “reasonably definite”, while principal distributions for “happiness”, “desire”, or “pleasure” will not.

Note that grantor trust status will not be triggered where a power to distribute principal that is not limited by a “reasonably definite standard” if the distributions may be made only to current income beneficiaries and if the distributions are “chargeable against the

180 proportionate part of corpus held in trust for payment of income to that beneficiary as if it constituted a separate trust.” Reg. § 1.674(b)-1(b)(5)(ii).

Example:

A trust instrument provides for payment of the trust income to the grantor’s two brothers for life, and for payment of the principal to the grantor’s nephews in equal shares. The grantor retains the power to distribute principal to pay for medical expenses that his brothers or nephews might incur. Retaining this power does not trigger grantor trust status because IRC § 674(b)(5)(A) excepts a power to invade principal for any beneficiary if the power is limited by a reasonably definite standard. If, however, this power was exercisable in favor of someone else who was not a beneficiary of the trust (for example a sister), IRC § 674(b)(5)(A) would not apply. Reg. § 1.674(b)-1(b)(5).

• Power to Withhold Income Temporarily

A trust is not a grantor trust if it includes the power to pay income to or withhold income from any current income beneficiary, so long as any accumulated income is ultimately paid to the income beneficiary (or to the beneficiary’s estate or appointees). IRC § 674(b)(6) and Reg. § 1.674(b)-1(b)(6).

Example:

A trust instrument provides that income shall be paid in equal shares to the grantor’s two adult children. The grantor reserves the power to withhold from either child any part of that child’s share of income and to add it to the principal until the younger child reaches the age of 30. When the younger child reaches the age of 30, the trust will terminate and the principal will be divided equally between the two children (or their estates). The exercise of this power is excepted under IRC § 674(b)(6)(B), even though it may permit the shifting of accumulated income from one beneficiary to the other. Reg. § 1.674(b)- 1(b)(6).

• Power to Withhold Income During Beneficiary’s Disability

A grantor is not taxed on trust income merely because he or she has the right to withhold the distribution of income where an income beneficiary is disabled or where he is under age 21. Note that it is not necessary that the income ultimately be payable to the income beneficiary from whom it was withheld, his estate or his appointees. IRC § 674(b)(7) and Reg. § 1.674(b)-1(b)(7).

• Power to Allocate Receipts Between Principal and Income

The power of the grantor to allocate receipts between principal and income is not, in itself, enough to trigger grantor trust status. IRC § 674(b)(8) and Reg. § 1.674(b)-1(b)(8).

181 2. Powers Held by Independent Trustees

An independent trustee’s power to pay or accumulate income or principal to a beneficiary or class of beneficiaries will not invoke ownership of the trust assets to the trustee or grantor, provided that the independent trust does not add to the class of permissible beneficiaries. IRC § 674(c) and Reg. § 1.674(c)-1.

3. Power Held by Trustees Other Than the Grantor or the Grantor’s Spouse

The power to pay, allocate, or accumulate income in accordance with “a reasonably definite external standard . . . set forth in the trust instrument” will not impute grantor trust status provided that the power is held and exercisable by a trustee or trustees other than the grantor or his or her cohabitating spouse, and that the power does not include a power to add beneficiaries. IRC § 674(d) and Reg. § 1.674(d)-2(b).

Estate Tax Consequences

The power to control the beneficial ownership of trust property typically results in inclusion in the grantor’s gross estate under either IRC § 2036 or IRC § 2038 (or both).

IRC § 2036(a) Estate Inclusion

IRC § 2036(a) includes in the grantor’s gross estate the value of any property the grantor gratuitously transferred and in which the grantor reserved the right to decide who shall receive the income from (or the possession or enjoyment of) the property for either the grantor’s life, a period that is not ascertainable without reference to the grantor’s death, or a period that does not terminate before the grantor’s death.

If the grantor retained or reserved an interest or right with respect to all of the property he or she transferred, the amount includible in the grantor’s gross estate is equal to the value of the entire transferred property less the value of the outstanding income interest not subject to the decedent’s interest or right and which is being enjoyed by another person at the time of the grantor’s death. Reg. § 20.2036-1(c).

The grantor’s retained power to designate the beneficiaries will typically trigger inclusion in the grantor’s gross estate, so long as the grantor’s power to choose affects the enjoyment of the income earned from the trust property. Reg. § 20.2036-1(b)(3).

Where the grantor serves as trustee and the trustee’s discretion to distribute income or principal to beneficiaries is limited to an ascertainable standard that is related to the maintenance, education, support, or health of a beneficiary, the trust is not deemed to be part of the grantor’s gross estate, since the trustee’s discretion is so limited, the trustee is deemed to have merely a ministerial power and not a discretionary power to control the beneficial enjoyment of trust property.

182 IRC § 2038 Estate Inclusion

Estate inclusion under IRC § 2038 is invoked when the grantor can revoke the transfer or when he retains the power to alter or amend a transfer of property (even if the transfer is otherwise irrevocable). The capacity in which a power to alter or amend a trust is irrelevant. Consequently, even if the grantor holds the power to alter or amend in a fiduciary capacity, § 2038 still applies. Again, to avoid inclusion, if the grantor wants to serve as trustee, the trustee’s discretion to distribute income or principal should be limited to an ascertainable standard related to the beneficiary’s maintenance, education, support, or health. The trustee will then have a ministerial power and not a discretionary power to alter or amend the initial transfer.

C. Administrative Powers: IRC § 675

Non-Arms-Length Transactions

Since administrative powers generally do not affect beneficial enforcement of trust property and do not represent a retained interest in trust assets, such powers would not trigger grantor trust status. However, if an administrative power allows the grantor to engage in non-arms-length transactions with the trust, the grantor will be treated as the owner of the portion of the trust as to which the power relates. IRC § 675 lists six administrative powers that trigger grantor trust status.

1. Power to Deal for Less than Adequate and Full Consideration

The grantor will be treated as the owner of the trust where the grantor, a non-adverse party, or both the grantor and a non-adverse party may purchase, exchange, or otherwise deal with or dispose of trust property for less than “an adequate consideration in money or money’s worth” without the approval or consent of any adverse party. IRC § 675(1) and Reg. § 1.675-1(c).

2. Power to Borrow Trust Property Without Adequate Interest or Security

The grantor will be deemed to be the owner of at least a portion of the trust where the grantor, a non-adverse party, or both may borrow principal or income without having to pay adequate interest or adequate security for the loan. This power is inapplicable where a trustee (other than the grantor) has a general power to make loans to anyone without the payment of adequate interest or the giving of adequate security. IRC § 675(2) and Reg. § 1.675-1(b)(2).

3. Grantor Borrows Trust Property Without Adequate Interest or Security

The grantor will be treated as the owner of at least a portion of the trust if the grantor or the grantor’s spouse has borrowed principal or income from the trust and has not completely repaid the loan (including interest) before the start of the taxable year. IRC § 675(3) and Reg. § 1.675- 1(b)(3).

183 4. Power to Vote Stock, Control Investments, or Substitute Property

The existence of certain “powers of administration” exercisable in a non-fiduciary capacity and without the approval or consent of anyone in a fiduciary capacity, will trigger grantor trust status. The term “powers of administration” includes the following: (1) the power to vote or direct the voting of stock or other securities held by the trust; (2) the power to control the investment of trust funds; and (3) the power to reacquire the trust property by substituting other property of an equivalent value. IRC § 675(4) and Reg. §1.675-1(b)(4).

Estate Tax Consequences

1. Power to Deal for Less than Adequate and Full Consideration

If a grantor dies holding a power to deal with trust property for less than full consideration, that property may be included in his gross estate under IRC § 2036(a), since the grantor may be deemed to have retained the right to choose who can enjoy the trust property. Under IRC § 2035(a), if the grantor surrendered this right within three years of his or her death, the trust property would be included in the grantor’s estate.

2. Power to Borrow Trust Property Without Adequate Interest or Security

The grantor’s power to borrow from the trust without having to pay adequate interest or without having to give adequate security should not trigger gross estate inclusion. Neither power affects the beneficial enjoyment of the trust property nor does such a power create an ability to alter or amend the trust.

3. Grantor Borrows Trust Property Without Adequate Interest or Security

Again, the grantor’s power to borrow from the trust does not necessarily indicate that the grantor has retained ownership of the trust property warranting inclusion in the grantor’s gross estate.

4. Power to Vote Stock, Control Investments, or Substitute Property

Where the grantor retains the right to vote shares of stock of a “controlled corporation”, he or she will be deemed to have retained the enjoyment of the transferred stock. IRC § 2036(b)(1). Accordingly, the grantor’s gross estate must include the value of the stock transferred to the trust.

The power to control trust investments in corporate stock and securities is not a power to vote the shares, so there is less risk for inclusion in the grantor’s gross estate.

The power to reacquire trust assets by substituting property of equivalent value does not warrant inclusion in the grantor’s gross estate because the grantor’s right to swap assets does not permit the grantor to make additional wealth transfers or to reduce the value of the trust’s holdings.

184 D. Power to Revoke: IRC § 676

The grantor will be treated as the owner of the entire trust where the grantor, a non-adverse party, or both may, at any time, revoke the trust and revest title in the trust property to the grantor.

Estate Tax Consequences

Under IRC § 2038, trust assets will be included in the grantor’s gross estate if the grantor holds the power to revoke the trust upon his or her death. Even if the grantor relinquishes the right to revoke the trust, the assets will be included in his or her estate if he or she dies within three years of relinquishing the power to revoke. IRC § 2035(a).

E. Income for Benefit of Grantor: IRC § 677

Under IRC § 677(a), the grantor is taxable as the owner of any portion of a trust where, without the consent or approval of any adverse party, trust income may be distributed to the grantor or his or her spouse, held or accumulated for the benefit of the grantor or his or her spouse, or applied to the payment of premiums on life insurance policies held by the grantor or his or her spouse. Reg. § 1.677(a)-1(b)(2).

Estate Tax Consequences

Under IRC § 2036(a), the trust property will be included in the grantor’s gross estate if the grantor retains the right to the trust’s income upon his or her death or for a period that is not ascertainable without reference to his or her death.

Under IRC § 2042, the payment of premiums on life insurance policies insuring the life of the grantor or the grantor’s spouse will not invoke gross estate inclusion if the grantor possesses no “incidents of ownership” in the policy.

IV. Liability for Income Taxes

Prior to the issuance of Rev. Rule 2004-64, the IRS had ruled privately in PLR 9444033 that the grantor’s payment of the income taxes on the income of a grantor trust would be a gift to the trust remainder beneficiaries. In Rev. Rule 2004-64 the IRS retreated from this position and issued guidance on the estate and gift tax consequences of the grantor’s payment of the income tax attributable to a grantor trust and on income tax reimbursement provisions.

Revenue Ruling 2004-64

The IRS determined that with respect to gift taxes, the grantor’s payment of the income taxes attributable to inclusion of trust income in the grantor’s taxable income is not a gift to the remainder beneficiaries because the grantor, not the trust, is liable for the income tax. This result is the same whether or not the trust contains a provision relating to reimbursement of income

185 taxes, and if there is such a provision, whether or not the trust is required to pay the income taxes or it is in the discretion of the trustee to do so.

However, with respect to estate taxes, the IRS distinguished between mandatory and discretionary reimbursement provisions. If the trust document or local law requires the trust to reimburse the grantor for the income tax attributable to inclusion of the trust’s income in the grantor’s taxable income, IRC § 2306(a)(1) requires that the full value of the trust be included in the grantor’s estate because the grantor has retained the right to have trust income expended to discharge his legal obligation. If, on the other hand, the trust document or local law affords the trustee discretion to reimburse the grantor for income taxes, that provision does not cause the trust to be included in the grantor’s estate whether or not the discretion is exercised. The IRS cautioned, however, that allowing the trustee discretion to reimburse for income taxes combined with other factors could cause estate inclusion. For instance, if the grantor and the trustee had an understanding or pre-existing arrangement as to the reimbursement of income taxes, or if the grantor retained the power to remove the trustee and name himself as successor trustee, then there could be estate inclusion.

V. Toggling Grantor Trust Status On and Off

Most grantor trust powers may be structured so that the grantor holding the power may relinquish it at any time, thereby terminating grantor trust status. The trust document also could give an independent third party the power to re-grant the released power to the grantor to trigger grantor trust status again.

Turning Grantor Trust Status Off

There are many reasons why a grantor may want to terminate grantor trust status. Notwithstanding the transfer tax advantages of reducing the grantor’s taxable estate, the grantor may decide that he no longer has the financial wherewithal to pay the income taxes. Or there may be a tax on a sizable capital gain which the grantor is not prepared to pay.

Although not specifically addressed in the Code or Regulations, it is presumed that the elimination of the specific power that created grantor trust status should instantly terminate its status as a grantor trust. See Madorin v. Commissioner, 84 T.C. 667 (1985) (finding that the power to add charitable beneficiaries was relinquished on January 1, and was effective from that date).

It may not be advisable to imbue the trustee with the authority to discontinue grantor trust status since the trustee owes a fiduciary duty to the beneficiaries, rather than to the grantor. Perhaps conferring the right to terminate grantor trust status to an unrelated person (and not an adverse party) who has no fiduciary duty may provide a solution.

Generally speaking many of the grantor trust powers can be turned off without significantly changing the dispositive provisions of the trust. For instance, a power to reacquire trust assets by substituting assets of equivalent value could be released without altering how the assets are to be distributed. Alternatively, if the power to alter beneficial enjoyment of the trust by adding

186 beneficiaries were retained, thereby achieving grantor trust status under § 674(b), the person holding the power to add beneficiaries may also be given the ability to release that power, thereby terminating grantor trust status.

Turning Grantor Trust Status On

It may be more difficult to restart grantor trust status than to discontinue it. The person who has the power to release a grantor trust power should not be given the power to re-trigger grantor trust status. One means of reinstating grantor trust status may be available in a state that allows modification of an irrevocable trust. (See PLR 200848017 where the grantor and beneficiaries agreed, under state law, to modify a trust to give the grantor a power, solely in a nonfiduciary capacity, to reacquire any property owned by the trust by substituting other property of equivalent value.)

When a trust is not originally a grantor trust, it may be possible to convert it to a grantor trust at a certain date or upon the occurrence of a stated event. For example, the trust may be structured so that the trustee has the right to this power every two years. At that time, the trustee could determine whether to “turn on” grantor trust status. In addition, grantor trust status may be achieved by distributing the assets of the non-grantor trust to a grantor trust (i.e., decanting).

IRS Scrutiny: Notice 2007-73

In Notice 2007-73, the IRS characterized certain toggled grantor trusts as “transactions of interest” triggering disclosure rules, list maintenance obligations, and potential penalties under IRC §§ 6011, 6111, and 6112. Specifically, the Notice focused on two tax shelters in which taxpayers “toggled” on and off grantor trust status in an effort to avoid recognizing gain or to claim a tax loss greater than actual economic loss. While the trusts at issue were both identified as “transactions of interest”, the Notice does not suggest that the mere act of terminating or reinstituting grantor trust status will subject the trust to IRS scrutiny.

VI. Reporting Considerations

Extent of the Grantor’s Ownership

If the grantor owns the entire trust (principal as well as ordinary income), all of the trust’s income, deduction, and credit items (including capital gains and losses) will be reported on the grantor’s individual tax return. Reg. § 1.671-3(a)(1). If the grantor owns specific trust property, he or she must report the items of income directly related to that property on his or her return, as well as a portion of the income for items related to the specific property and other trust property. Reg. § 1.671-3(a)(2). If the grantor is the deemed owner of an undivided fractional interest in trust property, all income, deduction, and credit items must be allocated on a pro rata basis. Reg. § 1.671-3(a)(3).

187 Methods of Reporting Where the Grantor Owns the Entire Trust

Form 1041

The trust may file a Form 1041. Trust income is disclosed on a separate statement attached to the Form 1041 and given to the grantor. Reg. § 1.671-4(a), (b).

Form W-9

The grantor may submit a Form W-9 to the trustee, and the trustee can provide each payor with the grantor’s name and taxpayer identification number. Reg. § 1.671- 4(b)(2)(i)(A). In addition, if the grantor is not a trustee or co-trustee, the trustee must provide the grantor with: (1) an annual statement listing items of income, deduction, and credit; (2) the identity of the payor of each item of income; (3) the information necessary to allow the grantor to properly report all items; and (4) a statement informing the grantor that items must be included on his or her individual return. Reg. § 1.671-4(b)(2)(ii).

Form 1099

The trustee may provide each payor with the trust’s taxpayer identification number and address and then file Form 1099 for all income items. The trust is listed as the payor and the grantor is listed as the payee. Reg. §§ 1.671-4(b)(2)(i)(B); 1.671-4(b)(2)(iii)(A).

Method of Reporting Where There is More Than One Deemed Owner of the Trust’s Assets

The trustee can either file Form 1041 or Form 1099.

Method of Reporting Where Only a Portion of the Trust is Treated as a Grantor Trust

The trustee must file Form 1041.

EIN Requirements

Under Reg. § 301.6109-1(a)(2), a grantor trust that is owned by a single person need not obtain a taxpayer identification number if the trustee provides the grantor’s name and taxpayer identification number and the trust address to all income payors to the trust. Under Reg. § 1.671- 4(b)(3), a taxpayer identification number must to be obtained if the trust is owned by more than one person. It is important to note that, under Reg. § 1.671-4(b)(8), a trust owned by a husband and wife who file jointly is considered to be owned by one grantor.

VII. TYPES OF GRANTOR TRUSTS AND PLANNING OPPORTUNITIES

A. Revocable Living Trust

Arguably, a revocable living trust is the most common and well-known type of grantor trust. A trust is revocable if, under the trust agreement, the grantor has retained the right to revoke the

188 trust and reclaim the trust property. Because the grantor of a revocable trust retains all of the rights over the trust property, the trust property is taxed to the grantor under IRC § 676 as if the grantor still owned the assets in his or her personal name.

Generally, use of a revocable trust is warranted in one of three situations: 1) the grantor requires, or anticipates that he or she will require, asset management; 2) the grantor wishes to avoid “dual” probate since he or she owns real property in two or more ; or 3) the grantor wishes to avoid probate all together. With respect to probate avoidance, a revocable trust is particularly effective where the grantor’s distributees are not known or their whereabouts are unknown or where the grantor anticipates that objections will be filed to his or her Last Will and Testament.

B. Income Only Trust

A trust which is created and funded by the grantor and which directs that all income be distributed to or made available to the grantor is a grantor trust under IRC § 677. Such a trust is included in the grantor’s estate under IRC § 2036. However, if drafted properly the trust will not be considered a “resource” for purposes of Medicaid eligibility, provided the trust is funded more than five years prior to the time that the grantor applies for government benefits. The grantor must relinquish the right to trust principal.

C. Grantor-Retained Annuity Trust (GRAT)

A GRAT must pay an annuity to the grantor for a specified term. Upon the conclusion of the term, the trust terminates and the remainder is paid to the beneficiaries. The Regulations set forth a number of requirements that the trust must meet. See Reg. § 25.2702-3. It is important to note that the beneficiaries of a GRAT do not receive a step-up in basis as to the trust property.

Requirements for a GRAT

Annual Payment of Annuity Amount

The trust is required to pay an annuity amount at least once a year to (or for the benefit of) the holder of the annuity interest. In addition, the annuity amount payable on the anniversary date of the creation of the trust must be paid no later than 105 days after the anniversary date. Reg. § 25.2702-3.

Fixed Amount

The annuity amount must be based on a fixed fraction or percentage of the initial fair market value of the property transferred to the trust. Although the fixed amount payable need not be the same every year, the amount that is paid in a given year cannot exceed 120 percent of the fixed fraction or percentage payable in the preceding year. Reg. § 25.2702-3.

189 Formula Adjustment

If the annuity amount is defined in terms of a fixed fraction or percentage of the initial value of the trust property, the trust should include an adjustment clause that allows the trustee to make adjustments for any incorrect determination of the fair market value of the trust property. Reg. § 25.2702-3.

Additions Prohibited

Additional contributions to the trust must be prohibited. Reg. § 25.2702-3. The trustee is not permitted to prepay the annuitant’s interest.

Payments to Other Individuals Prohibited

Payments from the trust cannot be made to any individual other than the annuitant until the annuity interest expires. Reg. § 25.2702-3.

Annuity Term

The term of the annuity must be expressed as the life of the annuitant, a specified term of years, or the shorter of those two periods. Reg. § 25.2702-3.

Consequences of GRAT Status

Income Tax Consequences

Because the annuity interest is typically worth more than 5% of the value of the trust at inception, a GRAT will usually qualify as a grantor trust. Therefore, the income tax consequences of grantor trust status will apply to the GRAT. IRC § 677(a).

Estate Tax Consequences

If the grantor outlives the term of the trust, the trust property is not includible in the grantor’s gross estate. However, if the grantor dies before the end of the trust term, estate inclusion is triggered under either or both of IRC § 2036(a) and IRC § 2039.

Gift Tax Consequences

The value of the grantor’s gift is calculated by valuing the property transferred to the GRAT and deducting the actuarial value of the grantor’s retained annuity interest. The present value of this interest is measured actuarially using IRC § 7520.

“Zeroed Out” GRATs

GRATs can be drafted so that the grantor’s taxable gift is extremely small if not zero. See Walton v. Commissioner, 115 T.C. 589 (2000). The IRS has now acquiesced in that

190 decision (Notice 2003-72, 2003-44 I.R.B. 964) and the Department of Treasury has promulgated regulations adopting the Walton decision. See Reg. § 25.2702-3(e), Ex. 5 and 6 (as amended by T.D. 9181).

D. Intentionally Defective Grantor Trust (IDGT)

The term “IDGT” is misleading. The trust is not actually defective at all, but operates exactly as it was intended to operate. As previously noted, initially grantor trust status was something that taxpayers sought to avoid. A trust that flunked the grantor trust rules came to be known as a “defective” grantor trust. Consequently, when a grantor intentionally retains a power over transferred assets that will trigger grantor trust status, the trust is known as an IDGT. The key to the IDGT tax planning strategy is the disconnect between the grantor trust rules and the estate tax treatment of transfers to trusts. As noted herein, not all of the retained powers listed in the grantor trust rules will cause trust assets to be included in the grantor’s gross estate. Consequently, an IDGT is an irrevocable trust that is structured to be a grantor trust for income tax purposes and a transfer to which is deemed to be a completed transfer for gift and estate tax purposes. While the grantor is taxed on the income earned by the trust, the trust assets are not included in his gross estate. Two of the most widely used powers by estate planners to create IDGTs are 1) the power to reacquire trust corpus by substituting other property of equivalent value under IRC § 675(4)(c) and 2) the power to borrow the corpus or income without adequate interest or security under IRC § 675(2). If using the latter power, it is best to imbue the power in a non-adverse party.

Installment Sale to an IDGT

This is a tax-efficient transfer technique which involves the grantor selling appreciated property to an irrevocable trust established for the benefit of those other than himself and his spouse (typically his children and more remote issue), in exchange for a promissory note. The result is that the asset sold to the trust and any subsequent appreciation is removed from the grantor’s grow estate and replaced with the note, essentially “freezing” the value of the asset included in the grantor’s estate. Typically the grantor receives a 10% cash down payment (“seed money” or “seed capital”) and the balance in a promissory note structured as an interest-only note with a final balloon payment 3-9 years out. The note must charge a minimal interest rate equal to the Applicable Federal Rate (“AFR”) which is also known as the “hurdle rate.” The IDGT will make interest payments to the grantor and there is no penalty for prepayment of principal.

Consequences of Installment Sale to an IDGT

Income Tax Consequences

The sale of the asset to the IDGT is a non-taxable event so that the transaction is disregarded for income tax purposes, meaning that the grantor will not recognize any gain from the sale. Annual interest payments payable to the grantor by the IDGT are not taxable as additional income. Rev. Rul. 85-13.

191 Estate Tax Consequences

If the grantor dies before the note has been repaid, the value of the note, not the value of the appreciated asset, is included in his gross estate. Essentially, the value of the asset has been frozen. If the grantor dies after the expiration of the term, no portion of the trust property is includible in the grantor’s gross estate because the property was sold, rather than gifted, to the trust. IRC § 2036(a).

Gift Tax Consequences

Because the trust pays adequate and full consideration in the form of a promissory note, the sale of property to a trust is not considered a gift.

Asset Swaps

One of the most common ways for a grantor to achieve grantor trust status is by reacquiring trust assets by substituting property of equivalent value. Because the assets held in an IDGT are not includible in the grantor’s gross estate upon his or her death, the assets are not eligible for the step-up in basis under IRC § 1014(a). However, if the grantor exercises the swap power by exchanging high-basis assets for the trust’s low basis assets, the assets will receive a step-up in basis upon the grantor’s death. The exchange of assets is not deemed to be a taxable event. The high-basis assets swapped into the trust are not includible in the grantor’s gross estate (so long as the trustee has a fiduciary obligation to ensure that the assets acquired and substituted are of equivalent value). Meanwhile, the low-basis assets are part of the grantor’s estate and receive a step-up in basis. Many last-minute to obtain a step-up in basis through gifting are not effective because of IRC § 1014(e). It provides that if a donor makes a gift to a donee who dies within a year of the gift, the gifted asset will not receive a step-up in basis if the asset is devised to the donor. Since the grantor and the trust are the same person for federal income tax purposes, there cannot be the gift required to invoke IRC § 1014(e).

E. Qualified Personal Residence Trust (QPRT)

A QPRT is an irrevocable trust that holds no assets other than an interest in the grantor’s personal residence and certain other related assets (i.e., cash for certain expenditures, insurance proceeds if the residence is destroyed). The requirements of a QPRT are set forth in Reg. § 25- 2702-5. The grantor gives his residence to a trust, but reserves the right to continue to occupy the residence for a certain period of time (the QPRT term). When the terms expires, ownership of the residence passes to the remainder beneficiaries of the trust. If the grantor dies before the term of the QPRT expires, the trust terminates and the residence reverts to the grantor’s estate.

Because the grantor retains the right to occupy the residence, the value of his gift to the trust is not the fair market value of the residence. Rather, the value of his gift is discounted; the longer the QPRT term, the greater the discount. However, the greater will be the risk of the QPRT failing because the grantor does not survive the term. Also, the higher the IRC § 7520 rate (used to value the gift) the lower the value of the gift (i.e., the remainder interest).

192 If the residence is sold or destroyed during the QPRT term (and the proceeds are not reinvested in another residence within two years), the QPRT convert s to a GRAT.

F. Irrevocable Life Insurance Trust (ILIT)

An ILIT is a trust which enables a grantor to exclude a life insurance policy or policies from the grantor’s taxable estate. The life insurance policy may insure only the grantor’s life (a single life policy) or it may insure the life of the grantor and his or her spouse (a second-to-die policy). Most ILITs are grantor trusts. Establishing an ILIT can reduce the grantor’s taxable estate, increase the beneficiaries’ liquidity (i.e., replace assets that the estate will use to pay for estate taxes), and shield policy proceeds from creditors.

1. Income Tax Consequences

Most ILITs own only life insurance policies and limited liquid assets to pay the insurance premiums. Accordingly, an ILIT will have little, if any, taxable income. Because the trust income may be applied to pay the premiums on the grantor’s life, any taxable income is attributable to the grantor under IRC § 677(3). However, there is some concern that the power to apply trust income to premium payments will result in grantor trust status only if the income was actually applied to pay the premiums. See Iversen v. Commissioner, 3 T.C. 756 (1944); Moore v. Commissioner, 39 B.T.A. 808 (1939), acq. 1939-2 C.B. Because of this uncertainty many estate planners include another grantor trust power in an ILIT (such as the power to substitute assets of equivalent value) to ensure grantor trust status is achieved.

2. Estate Tax Consequences

Life insurance proceeds are included in a decedent’s gross estate if the decedent possessed an “incident of ownership” in the policy. IRC § 2042(2). Incidents of ownership are defined as the decedent’s right to the economic benefits of a life insurance policy. Reg. § 20.2042-1(c)(2). Such benefits include outright ownership of the policy, as well as the right to change beneficiaries, surrender or cancel the policy, assign the policy, revoke an assignment, pledge the policy as collateral for a loan, and obtain a loan against the surrender value of the policy. To avoid gross estate inclusion, the trust should be drafted in such a manner so that the insured has none of these powers, either as an individual or as a trustee. Reg. § 20.2042-1(c)(4).

In addition, if the life insurance proceeds are payable to the executor or are subject to a “legally binding” obligation to pay estate obligations, the proceeds will be included in the insured’s gross estate. IRC § 2042(1). Inclusion can be avoided if the trust provides that the proceeds may be used for estate obligations. In other words, the trustee should be given discretionary power, rather than a “legally binding” obligation, to use the proceeds to pay estate expenses. Reg. § 20.2042-1(b)(1). While this discretionary power by itself will not trigger gross estate inclusion, any proceeds paid pursuant to this authority may be included in the decedent’s gross estate.

193 3. Funding an ILIT

Transfer Versus Purchase

Either a grantor can fund an ILIT with an existing life insurance policy or the trustee can purchase a new policy which will be owned by the trust.

If the grantor obtains the policy and transfers it to the trustee, the policy proceeds are includible in the insured’s gross estate if he or she does not outlive the transfer by at least three years. IRC § 2035(a). IRC § 2035 does not apply to transfers for adequate and full consideration. Therefore, the insured could sell the policy to the trust or a beneficiary. IRC § 2035(d). However, the sale will be deemed a transfer of the policy for value, which in turn may trigger income tax consequences. IRC § 101(a)(2).

Under the transfer for value rule, if a life insurance policy is transferred for valuable consideration, all or part of the death benefit proceeds are subject to federal income tax. The portion of the death proceeds equal to the consideration paid to purchase the contract plus the transferee’s basis in the contract are received income tax free; however, the remaining death proceeds are taxable income.

Under IRC § 101(a)(2), death benefit proceeds will not be subject to income taxation where the transfers are made to the following transferees: (1) the insured; (2) a partner of the insured; (3) a partnership in which the insured is a partner; (4) a corporation in which the insured is an officer or shareholder; or (5) any person where the transferee’s basis is determined in whole or in part by reference to the transferor’s basis.

Gift Tax Consequences

The transfer to an irrevocable trust of an insurance policy, or of cash to pay premiums, will be deemed a gift and may trigger gift tax liability depending upon the value of the gift. If the trust grants the beneficiaries Crummey withdrawal rights (see below) that equal the annual gift tax exclusion amount, then to the extent the value of the insurance policy or cash is less than the combined Crummey withdrawal rights, the transfer will not result in a taxable gift. For instance, if there are five beneficiaries who have withdrawal rights, a policy with an interpolated reserve value of $70,000, or a cash gift of that amount, could be transferred to the trust without creating a gift tax liability. If the value of the insurance policy or cash is greater than the combined Crummey withdrawal rights, the excess is a taxable gift.

Estate Tax Consequences

An individual’s gross estate includes property owned at death, as well as property in which the individual has retained certain interests. Under IRC § 2035, if an individual gives an interest in property or relinquishes a power over property within three years of his or her death, and if the property would have been included in the individual’s gross estate under IRC §§ 2036, 2037, 2038, or 2042, if the transfer had not been made or the power not relinquished, the value of that property is includable in the decedent’s taxable estate.

194

4. ILIT Administration

Crummey Withdrawal Rights

Under Reg. § 25.2503-2, a gift to an irrevocable trust is a gift to the beneficiaries. Because a gift to a trust does not qualify as a present interest gift, the grantor does not get the benefit of the annual gift tax exclusion under IRC § 2503. However, a gift can qualify for the annual gift tax exclusion if the beneficiaries are granted an immediate right to withdraw a portion of the funds. This right of withdrawal is required in order for the gift to be deemed a present interest and qualify for the annual gift tax exclusion. A beneficiary’s right of withdrawal is known as the “Crummey” withdrawal power.

Crummey Review

In Crummey v. Commissioner of Internal Revenue, the Ninth Court had to choose which legal standard to apply in deciding whether a gift to a trust, coupled with a withdrawal right, qualified as a present interest gift. 397 F.2d 82 (9th Cir. 1968). The IRS contended that the Court should focus on the likelihood of present enjoyment. Id. at 87. In other words, if the facts and circumstances indicated that the beneficiary would not withdraw the gift, the gift would be one of a future interest. However, the Court held that the gifts to the trust were present interest gifts qualifying for the annual exclusion. Id. at 88. In doing so, the Court adopted the taxpayer’s argument that if the beneficiary has the right to demand withdrawal of the gift, and if that right cannot be legally resisted by the trustee, the gift is a present interest qualifying for the annual exclusion. In Crummey, each child had separate trust shares and the right to make an effective demand upon the trustee of the deposits to his or her share before the end of the year. Id. at 83.

Clarification Since Crummey

Since Crummey, courts have uniformly held that there are only two factors in determining whether a gift to a trust qualifies as a present interest: (1) whether the beneficiary has the immediate right to withdraw an ascertainable amount; and (2) whether the trustee can legally resist that right. A gift will qualify for the annual exclusion if the beneficiary has the immediate right to withdraw, and the trustee cannot legally resist. See Estate of Cristofani v. Commissioner of Internal Revenue, 97 T.C. 74 (1991) (a gift is one of a present interest if the beneficiary has the power to withdraw trust corpus, and the trustee cannot legally resist the beneficiary’s demand for payment); Estate of Holland v. Commissioner of Internal Revenue, 73 T.C.M. 3236 (1997) (confirming that the correct test for determining whether a gift qualifies as a present interest is whether the beneficiary’s demand right can be legally resisted).

Notice and Duration of Withdrawal Rights

Does a beneficiary need to receive notice of the withdrawal right for a grantor to obtain the benefit of the annual exclusion? Must a beneficiary be granted a minimum period of time within which to exercise this right?

195 IRS’ Position

In Rev. Ruling 81-7, the IRS announced that a beneficiary must be given adequate notice of the withdrawal right and sufficient time to exercise that right. The grantor made a gift to the trust “shortly before the end of the year,” at which time the beneficiary’s withdrawal right would lapse. The grantor did not inform the beneficiary of the existence of the withdrawal right before it lapsed. “In failing to communicate the existence of the demand right and in narrowly restricting the time for its exercise,” the grantor did not give the beneficiary a reasonable opportunity to learn of and exercise the demand right before it lapsed. Rather, the grantor’s “conduct made the demand right illusory and effectively deprived [the beneficiary] of the power.”

The IRS’ position is that a beneficiary must have knowledge of both the gift and the withdrawal right to have immediate use, possession, or enjoyment of the property. Notice to a beneficiary must be actual and reasonable. In other words, a beneficiary must have a reasonable opportunity to learn of and exercise the demand right before it lapses. In addition, notice must be current, meaning that a beneficiary must have the real and immediate benefit of the gift in order for the gift to be a transfer of a present interest.

The IRS also mandates that a beneficiary have a sufficient amount of time to exercise the withdrawal right. Under Private Letter Rulings 93-11-021, 92-32-013, and 92-18-040, thirty days is a sufficient amount of time. Under Technical Advice Memorandum 96-28- 004, four days is insufficient.

Judicial Decisions

In Crummey, the Ninth Circuit declared that “As a practical matter, it is likely that some, if not all, of the beneficiaries did not even know that they had any right to demand funds from the trust. They probably did not know when contributions were made to the trust or in what amounts. Even had they known, the substantial contributions were made toward the end of the year so that the time to make a demand was severely limited.” Crummey v. Commissioner of Internal Revenue, 397 F.2d 82, 88 (9th Cir. 1968). Yet, the Ninth Circuit found that, even considering the lack of notice, the withdrawal contributions were present interest gifts. Id.

Similarly, in Estate of Holland v. Commissioner of Internal Revenue, the Court found that the trustees’ failure to comply with the trust’s provision requiring written notice did not necessitate a finding that the beneficiaries did not have present interests in the gifts, where the beneficiaries were verbally informed of their withdrawal rights. 73 T.C.M. 3236 (1997).

These Court decisions are clear: while written notice may be recommended, written notice is not relevant in determining whether a contribution qualifies for the annual exclusion. However, best practice in order to successfully defend an IRS audit is for written Crummey notices to have been issued annually.

196 Likewise, it is best to provide in the trust a definite time frame for exercise of the withdrawal right, such as 30 or 45 days from the date of contribution. Stating that the right must be exercised “by the end of the year” or “by December 31st” can be both too broad and too narrow. In addition, the notice should include the amount of the gift that is subject to the beneficiary’s right of withdrawal, as well as a request that the beneficiary notify the trustee if he wishes to exercise the withdrawal right.

5. The Trustee

Insured as Trustee

There has been litigation over the extent to which incidents of ownership held by the insured in a fiduciary capacity will cause inclusion of policy proceeds under IRC § 2042(2). Reg. § 20.2042- 1(c)(4) provides:

A decedent is considered to have an “incident of ownership” in an insurance policy on his life held in trust if, under the terms of the policy, the decedent (either alone or in conjunction with another person or persons) has the power (as trustee or otherwise) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof, even though the decedent has not beneficial interest in the trust.

If the goal is estate tax exclusion, the better practice is not to name the grantor/insured as trustee.

Insured’s Spouse as Trustee

If the insured/grantor would like to maintain practical access to decision-making and/or trust assets, he or she could name his or her spouse as a co-trustee, as long as the trust does not hold second-to-die insurance. The spouse is able to (but need not) ask the grantor for advice when administering and distributing trust property. If the insured/grantor names the spouse as co- trustee, the property will not be included in the insured/grantor’s estate. IRC §§ 2035-2038 are inapplicable so long as the spouse did not create, or make transfers to, the trust. IRC § 2042 also will not apply as long as the spouse is not the insured.

Beneficiary as Trustee

If a beneficiary in his or her role as trustee may make a distribution to himself or herself that is not limited by an ascertainable standard, the trustee-beneficiary will be deemed to hold a general power of appointment. Regardless of whether the trustee-beneficiary exercises this power in favor of himself or herself, the trust property will be included in the beneficiary’s gross estate if he or she dies while serving as trustee. In order to avoid inclusion where a beneficiary-trustee is permitted to make distributions to himself or herself, distributions should be based upon an ascertainable standard, or a co-trustee should be appointed to make discretionary distributions to the trustee-beneficiary.

197 Independent Corporate Trustee

If the grantor chooses an independent trustee and retains no beneficial trust interests, the trust property will not be included in either the grantor or spouse’s gross estate. Two advantages of using an independent corporate trustee are greater trustee experience with money management and continuity of administration.

Professional Trustee

Under the Uniform Prudent Act (the “UPIA”), a trustee who possesses special skills or expertise, or who is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, has a duty to use those special skills. Therefore, professional trustees are held to a higher standard of care than non- professional trustees, such as relatives and friends.

National Bank Trustee

National banks serving as trustee must adhere to both the UPIA and requirements concerning the purchase and monitoring of life insurance of the Office of the Comptroller of the .

6. Creating Flexibility in the Trust

Replacing the Trustee

A grantor may retain the right to terminate and replace the trustee and name a successor trustee without causing the trust assets to be included in his or her estate. Including a trustee removal and replacement provision in a trust is prudent for a number of reasons, especially where the trustee is not performing or is not acting in the beneficiaries’ best interests. However, a grantor’s right to appoint a successor trustee should be limited. The grantor should not be able to appoint himself or herself as successor trustee, or any person who is related or subordinate to the grantor as defined in IRC § 672(c) (i.e., the grantor’s spouse, children, grandchildren, mother, father, siblings, an employee of the grantor etc.). See Rev. Rule 95-58.

Trustee Borrowing and Exchanging

The trustee should be given the authority to borrow against the insurance policy and the power to exchange the policy if the existing policy becomes cost prohibitive or is underperforming.

Allowing Principal Distributions

Adding flexibility by drafting to provide for changing or unforeseen circumstances is crucial. One option is to provide for unlimited discretionary principal distributions of the trust assets outright to the beneficiaries during the lifetime of the grantor/insured. Including this language gives the trustee the ability to distribute the insurance policies outright to the beneficiaries if the original purpose of the ILIT is no longer relevant. These principal distributions may be equal or

198 unequal depending on the discretion the grantor wishes to give the trustee. The advantage to allowing distributions to the beneficiaries as opposed to the grantor is that a distribution of the insurance policy to the beneficiaries avoids creating estate tax issues for the grantor/insured. One disadvantage to allowing distributions to the beneficiaries is that the beneficiaries will now own the policies outright, and, among other issues, the policies become subject to the claims of creditors of any of the beneficiaries. This language also gives the trustee maximum authority for purposes of decanting the trust (see below).

Defining Interested Parties

Expressly providing for the equivalent of vertical and horizontal virtual representation by the terms of the trust document also adds flexibility if minors or incapacitated individuals are beneficiaries or otherwise interested parties in a trust matter. Incorporating this language reduces the need for court involvement if the trust requires modification or termination.

7. Modifying or Terminating an ILIT

Revocation of Trusts: EPTL § 7-1.9

EPTL § 7-1.9 provides that “[u]pon the written consent . . . of all the persons beneficially interested in a trust of property . . . the creator of such trust may revoke or amend the whole or any part thereof by instrument in writing acknowledged or proved in like manner, and thereupon the estate of the trustee ceases with respect to any part of such trust property, the disposition of which has been revoked.” Therefore, the grantor can amend or revoke an unamendable, irrevocable trust if he obtains the consent of all of the beneficiaries.

Decanting: EPTL § 10-6.6

Power of Appointment

A power of appointment grants authority to designate the recipients of property held in trust. It may be given to a beneficiary to allow the beneficiary to direct the ultimate distribution of his or her share. A power of appointment can be limited or general. A limited power of appointment allows the beneficiary to allocate his or her share of the trust among certain classes of recipients, but not to the beneficiary, the beneficiary’s estate, or creditors of the beneficiary or the estate. A general power of appointment allows the beneficiary to allocate all or part of his or her share of the trust among any individuals or organizations the beneficiary desires.

Expansion of the Power of Appointment

In 2011, the New York adopted significant revisions to EPTL § 10-6.6, substantially broadening a trustee’s power to appoint assets from an irrevocable trust into a new trust (or trusts) with different terms. “Decanting” is the process by which a trustee with the discretion to invade trust principal transfers property from the original trust to another trust. EPTL § 10-6.6 sets forth two categories of decanting power, depending

199 upon whether the authorized trustee has unlimited or limited discretion to invade trust principal. In both cases, under EPTL § 10-6.6(n) decanting is prohibited if it reduces, limits or modifies “any beneficiary’s current right to a mandatory distribution of income or principal, a mandatory annuity or unitrust interest, a right to withdraw a percentage of the value of the trust or a right to withdraw a specified dollar amount, provided that such mandatory right has come into effect with respect to the beneficiary.”

Unlimited Discretion

“Unlimited discretion” means “the unlimited right to distribute principal that is not modified in any manner.” EPTL § 10-6.6(s)(9). Words such as best interests, welfare, comfort, and happiness are not to be considered limitations or modifications of the trustee’s right to distribute principal. EPTL § 10-6.6(b) states: “[a]n authorized trustee with unlimited discretion to invade trust principal may appoint part or all of such principal to a trustee of an appointed trust for, and only for the benefit of, one, more than one or all of the current beneficiaries of the invaded trust (to the exclusion of any one or more of such current beneficiaries). The successor and remainder beneficiaries of such appointed trust may be one, more than one or all of the successor and remainder beneficiaries of such invaded trust (to the exclusion of any one, more than one or all of such successor and remainder beneficiaries).” Therefore, an authorized trustee with unlimited discretion to invade trust principal may decant if the appointed trust is solely for the benefit of any one or more of the current beneficiaries of the invaded trust; decanting may not be used to create a beneficial interest in a new beneficiary.

Limited Discretion

Notably, EPTL § 10-6.6(c) states: “[a]n authorized trustee with the power to invade trust principal but without unlimited discretion may appoint part or all of the principal of the trust to a trustee of an appointed trust, provided that the current beneficiaries of the appointed trust shall be the same as the current beneficiaries of the invaded trust and the successor and remainder beneficiaries of the appointed trust shall be the same as the successor and remainder beneficiaries of the invaded trust.” This provision allows a trustee to decant to an appointed trust with the same current, successor, and remainder beneficiaries as the invaded trust, despite having limited discretion to invade trust principal. While this does not allow a trustee with limited invasion power to change the beneficiaries or invasion standards of an invaded trust, it does provide a trustee the opportunity to alter other trust provisions, such as changing successor trustees or retaining assets in continuing trusts, assuming beneficial interests have not vested.

Authorized Trustee

Only an “authorized trustee” may decant trust assets. EPTL § 10-6.6(s)(2) defines an “authorized trustee” as “any trustee or trustees with authority to pay trust principal to or for one or more beneficiaries other than (1) the creator, or (ii) a

200 beneficiary to whom income or principal must be paid currently or in the future, or who is or will become eligible to receive a distribution of income or principal in the discretion of the trustee (other than by the exercise of a power of appointment held in a non-fiduciary capacity).”

Fiduciary Duties

Under EPTL § 10-6.6(h), an authorized trustee may only exercise the decanting power if a prudent person would consider it in the best interests, under the prevailing circumstances, of one or more proper objects of the exercise of the power. If there is substantial evidence of a contrary intent of the grantor, and if it cannot be established that the grantor would have changed his or her intent under the circumstances existing at the time of the exercise of the power, decanting is not allowed. That being said, under EPTL § 10-6.6(l), there is no affirmative duty to exercise the power to invade principal; accordingly, no inference of impropriety will be made as a result of an authorized trustee not exercising the decanting power. In addition, under EPTL § 10-6.6(o), an authorized trustee must consider the tax implications of the exercise of the power to decant.

8. Avoiding the Reciprocal Trust Doctrine

The reciprocal trust doctrine is a judge-made doctrine that was developed in response to the potential for gift and estate tax abuse where two grantors create trusts for each other. In most cases, this doctrine arises where A is the beneficiary of a trust created by B, and B is beneficiary of a trust created by A. The doctrine seeks to reveal collusive transfers to trusts that would otherwise avoid taxation.

Lehman and Grace

The first articulation of the doctrine has been credited to the Second Circuit in Lehman v. Commissioner of Internal Revenue, 109 F.2d 99 (2d Cir. 1940). In that case, two brothers each created two trusts for each other. Id. at 100. Each trust provided for income to the grantor’s brother, gave the grantor’s brother the right to withdraw $75,000 from the principal of the trust, and provided that the remainder would go to the grantor’s issue. Id. Without application of the reciprocal trust doctrine, neither trust would be included in the gross estate of either brother. Id. However, the Court applied the doctrine to “uncross” the trusts, holding that the $150,000 that the decedent could have withdrawn from the trusts that his brother created was includible in the decedent’s estate. Id. at 101.

The Supreme Court redefined the reciprocal trust doctrine in v. Grace, setting forth a two-pronged test governing the application of the doctrine. 395 U.S. 316 (1969). The decedent was an affluent man at the time he married his wife, Janet, in 1908. Id. at 318. Janet had no wealth or property of her own. Id. On December 15, 1931, the decedent executed a trust instrument in which he named Janet as the income beneficiary for her life. Id. at 318-19. Janet was given the authority to designate, by will or deed, the manner in which the trust estate remaining at her death was to be distributed among the decedent and their children. Id. at 319.

201 On December 30, 1931, Janet executed a trust that was virtually identical to the decedent’s trust instrument. Id. Janet’s trust was also funded with the decedent’s assets. Id. Janet died in 1937, and the decedent died in 1950. Id. The IRS argued that the trusts were reciprocal, and that the value of Janet’s trust that benefitted the decedent during his lifetime was a part of his taxable estate. Id. at 320.

The Court agreed with the IRS, noting that “application of the reciprocal trust doctrine is not dependent upon a finding that each trust was created as a quid pro quo for the other.” Id. at 324. In addition, the Court held that it is not necessary to prove the existence of a tax-avoidance motive. Id. Rather, “application of the reciprocal trust doctrine requires only that the trusts be interrelated, and that the arrangement, to the extent of mutual value, leaves the grantors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries.” Id. In this case, the Court found that it was undisputed that the two trusts were interrelated. Id. The trusts were substantially identical in terms, and were created at approximately the same time. Id. at 325. As such, the trusts were part of a single transaction designed and carried out by the decedent. Id. Moreover, the transfers in trust left each party, to the extent of mutual value, in the same objective economic position as before. Id. Ultimately, the decedent’s estate remained undiminished to the extent of the value of his wife’s trust; thus, the value of his estate had to be increased by the value of that trust. Id.

Although a common estate planning practice is to create mirror estate plans for a husband and wife, this practice is problematic when a husband and wife create mirror ILITs naming each other as beneficiaries. The drafting attorney must be careful to avoid drafting identical trusts. In order to accomplish this, the trusts should be created and funded at different times, preferably months apart. Alternatively, minor differences to the provisions, such as providing the surviving spouse with a limited power of appointment after the grantor’s death in one document and not in the other, can be included.

202 ______IRREVOCABLE TRUST AGREEMENT

THIS AGREEMENT is made as of the ____ day of ______, 20___ by and between ______, residing at ______, hereinafter referred to as “Grantor” and ______, residing at

______, hereinafter referred to as “Trustee,”

W I T N E S S E T H:

WHEREAS the Grantor is desirous of establishing an irrevocable trust for the benefit of his issue; and

WHEREAS the Grantor has or will hereafter transfer and assign to the Trustee cash and/or other property;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Grantor and the Trustee agree as follows:

ARTICLE ONE TRUST PROPERTY

A. The Grantor hereby transfers and assigns to the Trustee, in trust, certain property listed in Schedule A attached hereto, for the purposes and on the conditions set forth hereafter.

B. With the consent of the Trustee, the Grantor reserves the right, for himself, for his estate and for others, to transfer any additional property, including cash or insurance policies of every kind and nature on the life of the Grantor or others, to this 1 249518 3041104v1

203 trust from time to time which, upon delivery to the Trustee, shall be held by the Trustee in accordance with and subject to the terms and conditions of this Agreement.

C. The Trustee shall have the power and authority to apply for insurance on the life of Grantor, of every kind and nature, in amounts and under terms which the

Trustee, in his sole discretion, deems advisable, and to use some or all of the property initially transferred and assigned to this trust, as well as any additions thereto, for this purpose.

D. Subject to the power conferred upon the beneficiaries (in paragraph A of

ARTICLE THREE hereof) to make withdrawals, the power conferred upon the Grantor

(in paragraph B of ARTICLE THREE hereof) to substitute property of equivalent value and the power conferred upon the Trustee (in paragraph C of ARTICLE THREE hereof) to make distributions, the Trustee shall hold the policies purchased by him or assigned to him and shall pay the premiums thereon, to the extent there are trust funds available therefor and to the extent these premiums have not been paid by others.

ARTICLE TWO IRREVOCABILITY

This trust shall be irrevocable and not subject to any amendment or alteration, and the Grantor hereby irrevocably assigns to the Trustee all right, title and interest in the trust property and relinquishes all administrative power over the trust property and also all power to control the beneficial enjoyment of the trust property.

2

204 ARTICLE THREE DISTRIBUTIONS OF INCOME AND PRINCIPAL DURING THE LIFETIME OF GRANTOR

A. Withdrawal Rights as to “Additions” and “Deemed Additions” during the

Lifetime of Grantor. Except as hereinafter otherwise provided, when an “addition” or

“deemed addition” (as hereinafter defined) is made to this trust during the lifetime of

Grantor, each of Grantor’s children and more remote issue who is then living (as that class may from time to time be constituted) shall have the right to withdraw from the principal of this trust his or her pro rata share of that addition or deemed addition which is equal to a fraction, the numerator of which shall be the fair market value of that addition or deemed addition (as determined at the time that addition or deemed addition is made in accordance with applicable federal gift tax laws and regulations) and the denominator of which is the number of Grantor’s children and more remote issue who are then living. Notwithstanding the foregoing, any person who makes an addition or deemed addition may specify in a written statement signed by him or her and filed with the trust records at the time such addition or deemed addition is made (i) whether or not that addition or deemed addition shall be subject to withdrawal rights, (ii) who among

Grantor’s children and more remote issue shall have a withdrawal right as to that addition or deemed addition and (iii) the extent of such beneficiary’s withdrawal right as to that addition or deemed addition (which shall be expressed in terms of a fractional share or dollar amount of that addition or deemed addition); but, in the absence of such written statement, Grantor’s then living children and more remote issue shall have their

3

205 respective withdrawal rights computed as hereinabove provided with respect to all such additions and deemed additions in that calendar year.

For purposes of this paragraph A, an “addition” to the trust shall refer to any contribution of cash or other property which is made by the Grantor or others, during the lifetime of that contributor, and “deemed addition” to the trust shall refer to all contributions attributable to the Grantor or others, including, but not limited to, a premium payment which is made by Grantor’s employer with respect to any group term or “split-dollar” life insurance policy on the life of the Grantor which is owned by this trust.

If any beneficiary exercises his or her withdrawal rights hereunder, the

Trustee shall satisfy the same out of the addition or deemed addition to the trust. To the extent that such addition is not sufficient, or is otherwise not available for distribution, such withdrawal right shall then be satisfied out of the trust assets on hand (including interests in any insurance policies); provided, however, that the Trustee shall determine which assets shall be used for this purpose, and, in connection therewith, the Trustee shall not distribute interests in any insurance policies unless all other assets shall have been exhausted. Any additions to the trust which are not required to satisfy such withdrawal rights shall be added to principal and held, administered and distributed as hereafter provided.

The Trustee shall promptly notify each beneficiary, in writing, whenever an addition or deemed addition has been made to the trust, and the beneficiary shall exercise his or her withdrawal right in each case by notifying the Trustee in writing

4

206 within thirty (30) days after receiving notice of that addition or deemed addition. The

Trustee shall thereupon make distributions to such beneficiary when he has ascertained the amount to which such beneficiary is entitled as hereinabove provided.

If a beneficiary fails to notify the Trustee as hereinabove provided, his or her withdrawal right shall lapse at the end of the aforesaid thirty (30) day withdrawal period with respect to that addition or deemed addition, but only to the extent that such power of withdrawal, when added to the value of any other power of withdrawal of such beneficiary which shall have lapsed during that calendar year, shall not exceed the greater of Five Thousand Dollars ($5,000) or five percent (5%) of the then current fair market value of the trust property from which such power of withdrawal may be exercised. If any powers of withdrawal of such beneficiary shall remain in effect after applying the foregoing provisions, such aggregate powers of withdrawal shall terminate and lapse on January 2 of each succeeding year, but only to the extent that such aggregate powers of withdrawal shall not exceed the greater of Five Thousand Dollars

($5,000) or five percent (5%) of the then current fair market value of the trust property from which such powers may be exercised.

If any beneficiary shall be under any legal disability of any kind, notice of any addition or deemed addition to the trust shall be made to, and execution of the aforesaid withdrawal rights shall be made by, that beneficiary’s legal or natural guardian, attorney-in-fact acting under a duly executed power of attorney, or other duly appointed personal representative, as the case may be, other than the Grantor who has made that addition or deemed addition.

5

207 It is the Grantor’s intent and purpose that the aforesaid powers of withdrawal shall take precedence over any other right or power herein conferred upon the Trustee or any beneficiary of the trust, and this trust shall be construed in accordance with such intent and purpose.

The determination by the Trustee of the amount subject to any power in existence under this paragraph A shall be final and conclusive on the beneficiaries of this trust. The Trustee shall not incur any liability to any such beneficiary as a result of this determination if made in good faith.

B. Substitution of Property of Equivalent Value. Grantor retains the power, solely in his individual capacity and not as a fiduciary, to substitute property of equivalent value for property then on hand in the trust without the approval or consent of any person acting in a fiduciary capacity. Subject to the limitations hereinafter set forth,

Grantor may exercise this power at any time from time to time during his lifetime by giving written notice to the Trustee then in office to this effect. Grantor must certify in such written notice that the substituted property and the trust property for which it is substituted are of equivalent value. Upon receipt of such notice, the Trustee shall have a fiduciary duty to the beneficiaries of this trust to ensure that the property which

Grantor seeks to substitute is equivalent in value to the property distributed to the

Grantor. Grantor may relinquish this power at any time by delivering to the Trustee a signed statement of this effect which is duly acknowledged before a notary public.

6

208 C. Payment of Income and Principal to Grantor’s Children and More Remote Issue.

(1) Subject to paragraph A above and except as otherwise provided in this paragraph C and ARTICLE TEN below, during the lifetime of Grantor, the Trustee, in his sole discretion, may apply so much or all of the net income and principal of this trust as follows: (a) to the payment of premiums on any insurance policies held by this trust or (b) to or for the use and benefit of Grantor’s children and more remote issue, in such proportions and amounts and at such times as the Trustee determines to be in their best interests, even though such payments shall result in the termination of this

Trust. However, such payments shall not consist of interests in insurance policies on the life of Grantor unless all other assets which are available for distribution have been exhausted.

(2) The Trustee is also authorized, in his sole discretion, to accumulate such income for future distribution as hereinabove provided or to add that accumulated income to principal.

(3) Distributions of income and principal to Grantor’s children and more remote issue need not be equal, nor shall equalization be made at any subsequent time by reason of any unequal payments.

(4) Notwithstanding anything in this paragraph C to the contrary, under no circumstances shall the Trustee use or apply any of the income or principal of this trust to discharge any support obligation which Grantor may owe under applicable law to any of his issue.

7

209 ARTICLE FOUR DISTRIBUTION OF INCOME AND PRINCIPAL AFTER THE DEATH OF GRANTOR

A. Upon Grantor’s death, the Trustee shall allocate all of the trust property

(including the proceeds of any life insurance policies on the life of Grantor) into as many equal shares as shall provide one (1) share for each child of Grantor living at the time of

Grantor’s death and one (1) share for each deceased child of Grantor who leaves a child or children (Grantor’s “grandchild” or “grandchildren”) living at the time of Grantor’s death. The shares thus allocated shall be distributed as follows:

(1) Each share allocated for a then living child of Grantor shall be distributed to that child.

(2) The equal share of each deceased child of Grantor who leaves a child or children living at the time of Grantor’s death shall be retained by the Trustee as the principal of a separate trust for the collective benefit of such grandchild or grandchildren, to be administered and distributed as provided in ARTICLE FIVE,

Section A.

If any share or portion of the remaining trust estate would be immediately distributable to a grandchild under the terms of the trust, the distribution may be made directly to such grandchild by the Trustee.

ARTICLE FIVE CONTINUING TRUSTS

A. Trust for Grandchildren.

Any share of the trust property (including the proceeds of any life insurance policies on the life of Grantor) to be retained by the Trustee for the benefit of the

8

210 children of a deceased child of Grantor (collectively, the “Beneficiaries,” or individually, a

“Beneficiary”) shall be administered and distributed in the following manner for their benefit, so long as any living Beneficiary is under the age of thirty-five (35).

(1) Income. The Trustee is authorized to distribute all or any part of the net income to or for the benefit of any one or more of the Beneficiaries, in such proportions and at such times as the Trustee, in its absolute discretion, deems appropriate, without regard to equality of distribution, for the health, education, maintenance and support of the Beneficiaries. Grantor recognizes that one or more of the Beneficiaries may have greater needs than the others due to circumstances which he cannot anticipate. Grantor expressly authorizes the Trustee to pay a larger share of the income, or all of it, to that Beneficiary having the greater need. The Trustee may, but is not required to, consider all income and other resources which are known to the

Trustee to be available to each Beneficiary and shall consider the standard of living to which each Beneficiary is then accustomed. Any undistributed net income shall be accumulated and added to principal at intervals determined by the Trustee.

(2) Principal.

a. General Discretion. The Trustee is authorized to distribute all or any part of the principal to or for the benefit of any one or more of the

Beneficiaries, in such proportions and at such times as the Trustee, in its absolute discretion, deems appropriate, without regard to equality of distribution, for the health, education, maintenance and support of the Beneficiaries. The Trustee may, but is not required to, consider all income and other resources which are known to the Trustee to

9

211 be available to each Beneficiary for those specific purposes and may consider the standard of living to which each Beneficiary is then accustomed. In making discretionary payments of principal, the Trustee may distribute more to some

Beneficiaries than others and/or may distribute to one or more Beneficiaries to the exclusion of others if the Trustee deems this necessary or appropriate in light of the circumstances, the size of the Trust, and the probable future needs of the Beneficiaries.

Any such payments shall be charged against the trust as a whole rather than against the ultimate distributive share of a Beneficiary to whom or for whose benefit the payment is made. The Trustee’s discretion includes the power to terminate the Trust at any time by distributing all principal as though the “payment date” had occurred.

b. Preference for Education. Grantor particularly desires that each Beneficiary shall have the opportunity for a college education and professional or post-graduate study, if he or she qualifies and so desires. Accordingly, Grantor expressly authorizes the Trustee to expend income and make such advances of principal as the Trustee, in its sole and uncontrolled discretion, deems necessary or advisable for the purpose of financing such college or post-graduate education as each

Beneficiary may wish to pursue, even though such advances may completely exhaust the trust.

(3) Distribution. The term “payment date” means the later of the date on which the Trust is created and the date on which the youngest living Beneficiary attains the age of thirty-five (35) or upon the earlier death of the only living Beneficiary under the age of thirty-five (35). On the payment date, the Trustee shall distribute all

10

212 principal and accrued or undistributed income to the then living issue of Grantor’s deceased child, per stirpes. If no such issue is then living, the Trustee shall distribute the remaining trust principal and any accumulated income in accordance with ARTICLE

FOUR, paragraph C, herein.

ARTICLE SIX LIMITATION ON ASSIGNMENT, ALIENATION AND RIGHTS OF CREDITORS IN TRUST PROPERTY PRIOR TO DISTRIBUTION

Neither the income nor principal interest in any trust herein created, while that interest is in the hands of the Trustee and before that interest is actually paid or delivered to the person entitled thereto, shall be subject to voluntary or involuntary anticipation, encumbrance, alienation or assignment, either in whole or in part, nor shall such interest be subject to any judicial process to levy upon or attach the same for or on behalf of such person’s creditors or claimants.

ARTICLE SEVEN POWERS OF TRUSTEE

By way of illustration and not of limitation on the powers of the Trustee, and in addition to any powers conferred upon the Trustee by law, but subject to the restrictions found in paragraph A of ARTICLE THREE and ARTICLE TEN, the Grantor authorizes the Trustee hereunder as follows:

A. to purchase from any person or corporation, including, but not limited to, the estate of the Grantor, at fair market value only, any stocks, bonds, securities or other property, real or personal, which is offered for sale by such person or corporation, including Grantor’s personal representative, whether or not such security or property is eligible for investments by fiduciaries under any statute or law; and the Trustee shall

11

213 incur no responsibility or liability for any loss resulting to the beneficiaries of the trust created herein from any purchase or from the retention of any assets so acquired.

B. to purchase insurance on the life of the Grantor of any type and nature, including permanent, term or group insurance or a combination thereof, and, in connection therewith, to enter into any “split dollar” agreement with any employer of

Grantor, or any other person or corporation, upon such terms and conditions as the

Trustee determines, in his sole discretion, to be in the best interests of the trust beneficiaries; to obtain, by way of assignment from the Grantor or others, insurance policies on the life of the Grantor of any type and nature; to exercise all rights and privileges under any such insurance policy, including, but not limited to, the right to change beneficiaries, the right to convert or substitute such insurance in any manner permitted by the insurer or by law, the right to elect any optional mode of payment, the right to borrow against such policies to the extent possible, and to pledge the same for any loan or loans.

C. to retain any property in the form received, to invest and reinvest the trust funds, including accumulated income, in any kind of property, real or personal, including stocks, bonds or other securities, investments in common trust funds or pooled investment funds, without being limited to investments authorized for trust funds by any governing laws, and without diversification as to kind or amounts.

D. to sell, exchange, , lease, or otherwise dispose of any property, real or personal, which forms a part of the trusts created herein, at public or private sale, for such purposes and upon such terms, including sales on credit with or without

12

214 security, in such manner and at such prices, as the Trustee shall determine to be in the best interests of the beneficiaries of such trust.

E. to borrow money from any source, including himself or others, and pledge or mortgage any property for any purpose incidental to the administration of the trust hereunder.

F. to delegate discretionary powers to agents, remunerate them, and pay their expenses, and to employ and pay the compensation of clerks and secretaries, accountants, custodians, and legal and investment counsel.

G. to manage, insure against fire or other risk, retain, repair, improve, alter, or lease any real property acquired by the trust hereunder for periods to begin presently or in the future, without regard to statutory restrictions on leasing and even though any such period may extend beyond the term of such trust.

H. to lend money to any person or corporation, including, but not limited to, the estate of Grantor upon such terms and conditions as the Trustee determines, in his sole discretion, to be in the best interests of the trust beneficiaries. The Trustee shall not be liable for any loss to any trust beneficiary for having acted in accordance with this paragraph in good faith.

I. to continue the conduct of any business in which the Grantor may have been engaged or in which Grantor may have had an interest at the time of his death and which comes into the possession of the Trustee at any time, for such period of time as the Trustee deems to be in the best interests of the trust beneficiaries.

13

215 J. to terminate the trust if its fair market value declines to a size which makes the continued retention of its principal in trust uneconomical, imprudent, or unwise; but no Trustee who is a beneficiary of the trust shall participate in the exercise of this power to terminate; if this power is exercised, all of the trust’s remaining principal and accrued or undistributed income shall be distributed to the beneficiary; however, if there are two or more beneficiaries, that principal and income shall be distributed between or among those beneficiaries with the same discretion which is granted in this Trust Agreement to distribute the trust’s principal;

K. in satisfying the right of a beneficiary to demand distribution of trust property in accordance with paragraph A of ARTICLE THREE, the Trustee is authorized to take any action that may be necessary and appropriate to ensure that such right will be satisfied in a timely and expedient manner including, without limitation, the following rights and discretions: to borrow money from any source, including but not limited to the cash surrender values of any life insurance policies transferred to this trust; to sell trust assets; or to surrender, distribute or otherwise dispose of all or any part of any life insurance policy or other property transferred to this trust. The withdrawal powers set forth in paragraph A of ARTICLE THREE are provided to ensure that the payment of premiums on any life insurance policies owned by the Trustee will qualify for the gift tax annual exclusion. If the Trustee determines that such withdrawal powers are not necessary to qualify the premium payments for the gift tax annual exclusion, the Trustee may, in its discretion, decline to issue the notice called for pursuant to paragraph A of

ARTICLE THREE.

14

216 L. to distribute all or any part of the principal and accrued or undistributed income to the trustees of any trust created for the same beneficiary or beneficiaries and having substantially identical terms and dispositive provisions, if doing so is advisable in the absolute discretion of the Trustee. All assets so distributed shall retain their character as income or principal when received by the trustees of such other trust, and shall be administered and distributed pursuant to that trust’s provisions as if originally received as part of the trust. The Trustee is further granted absolute discretion to determine when, how, and whether to exercise this discretion, and the assets and amounts to be distributed. The exercise or non-exercise of this discretion shall be binding upon and conclusive against all persons interested in, or claiming an interest in, the trust created under this Agreement, regardless of any difference in the identity of the remaindermen of the trust created under this Agreement and the remaindermen of the trust with which it is merged.

M. in addition to, and in further clarification of, the rights and discretions granted to the Trustee in this Trust Agreement, the following terms and conditions shall apply with respect to any life insurance policies which may be held in the trust:

(1) Exercise of Owner’s Rights. All right, title and interest in and to any life insurance policy transferred to the Trustee is vested in the Trustee. Authorization and power to exercise all or any of the options, benefits, rights, privileges and interests under the policy are granted to the Trustee. Grantor hereby relinquishes all rights and powers in such policies of insurance and will, at the request of the Trustee, execute all other instruments reasonably required to effectuate this relinquishment. In addition, the

15

217 Trustee shall have the following powers with respect to any insurance policies now or hereafter held in the trust: (i) to acquire by gift, bequest, purchase or otherwise, as a part of the trust, one or more insurance policies insuring the life of Grantor, which policies shall be owned by and payable to the Trustee; (ii) to exercise any right, power or discretion with respect to the acquisition, retention, disposition or maintenance in force of any policy held in trust, and any incident of ownership with respect to any such policy, including but not limited to the powers stated elsewhere in this paragraph; (iii) to divide or otherwise sever any such policy into two or more policies insuring any insured of any such policy; (iv) to receive dividends or distributive shares of surplus thereon in cash, or apply the same to the payment of premiums thereon or to the purchase of additional insurance, including term or paid-up insurance, or permit the same to remain on deposit at interest with the respective insurers, and to receive such interest or permit it to accumulate; (v) to receive from the insurer or from any bank or other lender such advances or loans which may be available on account or from any such policy or on the security of any such policy; (vi) to receive the cash surrender value of any such policy, by loan, withdrawal or otherwise, the proceeds of matured endowments, or other lifetime policy benefits; (vii) to exercise any and all options, elections, rights and privileges granted in any such policy, including but not limited to the right to obtain additional insurance coverage on the life of any other person, pursuant to any insurability rider allowing such acquisition, if the Trustee deems such acquisition to be in the best interests of the trust beneficiaries, taking into account such considerations as the Trustee may deem relevant; (viii) to sell, assign (absolutely or as collateral),

16

218 transfer, pledge or hypothecate any such policy; (ix) to convert any such policy into an extended term coverage contract, supplementary contract, fully or reduced paid-up contract, or into any other form of insurance or annuity; and (x) to exercise any and all such other rights that the owner of a life insurance policy has with respect to such policy.

(2) Dealings with Insurer. Any insurance company which has issued any life insurance policy held hereunder is authorized and directed to recognize the

Trustee as absolute owner of the policy and as fully entitled to all options, benefits, rights, privileges and interests of any such policy. Any receipts, releases and other instruments executed by the Trustee in connection with the policy shall be binding and conclusive upon any insurance company and upon all persons interested in the Trust

Estate.

(3) Proceeds. Any policy of life insurance held hereunder at any time shall designate the Trustee as beneficiary thereof. For the purpose of collecting monies due under the policy, the Trustee shall have the power to make proper proofs and releases to enable it to receive the proceeds thereof, to institute any suit or proceeding, and to perform any and all other acts necessary or appropriate for accomplishing such purpose. The Trustee shall not, however, be obligated to institute or maintain any litigation to enforce payment of the policy until it shall have been indemnified to its satisfaction. The receipt of the Trustee shall be in full acquittance and discharge of any insurance company issuing the policy and, upon payment of the proceeds thereof to the

Trustee, the insurance company shall be exempted from all liability as to the proper

17

219 application of the proceeds. Expenses incurred in making such collections shall be a proper charge against the principal of the trust.

(4) Payment of Premiums. The Trustee shall be under no duty or responsibility to pay any premiums or other charge required to continue in force the policies or any additions thereto or substitutions therefore, or to make certain that such premiums are paid by the Grantor or any other person, or to notify any persons of the nonpayment of premiums, or to procure renewals thereof, or to see that the policies are kept in force, and he shall be under no responsibility or liability of any kind in case such premiums are not paid. The Trustee, nevertheless, may pay premiums due on such policies if cash sums are held by or deposited with the Trustee sufficient to pay the same and such sums are not withdrawn from this trust pursuant to the powers set forth in paragraph A of ARTICLE THREE. Trustee also may apply any dividends received by

Trustee on such policies for the payment of premiums thereon or the purchase of additional insurance.

(5) Borrowing Against Policies. The Trustee, in its sole discretion, may apply any cash value attributable to such policies to the purchase of paid-up insurance or of extended insurance, or the Trustee may borrow either from the insurer or another, upon such policies for the payment of premiums due thereon or any other purpose, pledging or collaterally assigning the cash value of the policies as security for the loans.

The Trustee shall have no responsibility with respect to any indebtedness of the Grantor existing prior to receipt of the policies by the Trustee, to the respective insurance companies or to a lender with which the policies have been deposited as collateral or to

18

220 which the policies have been collaterally assigned. The Trustee may enter into a split dollar agreement with another for the payment of premiums on any policy, and he may honor or assume any split dollar agreement in existence with respect to any policy when it is received by the Trustee. The Trustee may accept the cash value of such policy upon its forfeiture and may exercise (being the owner thereof) without limitation any and all other rights and incidents of ownership.

ARTICLE EIGHT COMPENSATION AND ACCOUNTING OF TRUSTEE

A. During the lifetime of Grantor, if the Trustee is a child of the Grantor, the

Trustee shall not be compensated for his services but shall be reimbursed for any expenses incurred as a result of administering the Trust. If the Trustee then in office is other than a child of the Grantor, the Trustee shall be compensated in such manner as is mutually agreed upon from time to time by the Grantor and Trustee.

B. Upon the death of Grantor, the Trustee then in office shall be compensated at the same rate and in the same manner as then provided by the laws of the State of New York for services as a testamentary trustee.

C. The Trustee shall be entitled at any time to have a judicial of his accounts. If a party to that judicial settlement proceeding has the same interest as a person under a disability, it shall not be necessary to serve the person under a disability. The Trustee may at any time settle his accounts by agreement with the current beneficiary or beneficiaries of the income and principal of the trusts created herein who are then over twenty-one (21) years of age, and that agreement shall bind all persons, whether or not then in being or then or thereafter entitled to any portion of

19

221 the trust, and shall effectively release and discharge the Trustee for the acts and proceedings so accounted for.

ARTICLE NINE DISTRIBUTION TO PERSONS UNDER TWENTY-ONE (21) YEARS OF AGE

If, pursuant to any provisions of this Agreement, all or any part of the property subject to the terms of this Agreement shall vest in absolute ownership in a minor,

Grantor authorizes and empowers the Trustee, in his absolute discretion, and without authorization by any court, to distribute the share of such person to a custodian under the Uniform Transfers to Minors Act to be held and administered by such custodian until such minor attains majority. The Trustee shall have the power to select the custodian and may select himself as such custodian and the person selected may serve as custodian in any jurisdiction which has adopted the Uniform Transfers to Minors Act.

No bond or other security shall be required of the custodian selected by the Trustee, including himself. The distribution to the custodian shall be made by the Trustee without court order. After effecting such distribution, the Trustee shall be relieved of all accountability with respect to the property so distributed.

For purposes of this Article, the term “minor” shall refer to any person who has not attained twenty-one (21) years of age on the effective date of distribution of his or her share of property hereunder, and the term “majority” shall refer to a minor’s twenty-first birthday, provided applicable state law permits such terms to be so defined for purposes of its Transfers to Minors Act, and the custodian shall administer any property paid over to it on behalf of such minor accordingly.

20

222 ARTICLE TEN TRUSTEES

A. Appointment of Trustees and/or Successor Trustees.

1. Irrevocable Trust. ______shall serve as initial Trustee under this Trust Agreement. If ______fails to qualify or ceases to act as Trustee for any reason, ______and

______shall serve as successor Co-Trustees. If either fails to qualify or ceases to act as Co-Trustee for any reason, the other shall serve as sole Trustee.

2. Trust for Grandchildren. ______shall serve as

Trustee of any trust created under this Trust for the benefit of the issue of

______. ______shall serve as Trustee of any trust created under this Trust for the benefit of the issue of ______.

B. Waiver of Bond. No Trustee or successor Trustee shall be required to give any bond or security in any court or jurisdiction for acting as such.

C. Resignation of Trustee. Any Trustee may resign at any time by delivering or mailing written notice to Grantor and to the successor Trustee herein named and also to the current trust beneficiaries who are then over twenty-one (21) years of age. Such resignation shall be effective upon the date specified in such notice, or within ten (10) days following the mailing or delivery of such notice, whichever is later; and, upon such date, all duties of such resigning Trustee shall cease, except the duty to account and turn over the trust assets.

D. Removal of Trustee. At any time during his lifetime, Grantor may remove any Trustee or successor Trustee by delivering or mailing written notice to the Trustee,

21

223 to the successor Trustee and also to the current trust beneficiaries who are then over twenty-one (21) years of age. In such written notice, Grantor may also appoint a

Trustee or successor Trustee, as the case may be, other than the Grantor, his spouse, his children, and his grandchildren, provided such Trustee is not a “related” or

“subordinate” party as those terms are defined in Section 672(c) of the Internal Revenue

Code, or any successor provision. Such removal and appointment shall be effective upon the date specified in such notice, or within ten (10) days following the mailing or delivery of such notice, whichever is later; and, upon such date, all duties of such

Trustee or successor Trustee who has been removed, shall cease, except the duty to account and turn over the trust assets.

E. Additional Corporate Trustees. At any time during the lifetime of Grantor or after his death, the Trustee then in office may appoint a bank or trust company of his choosing which has at least One Hundred Million Dollars ($100,000,000) in assets under trust administration (hereafter “Corporate Trustee”) as a Co-Trustee or as successor Trustee of any trust hereunder, by filing a written statement to this effect with the trust records which is signed and acknowledged in the manner required to record a conveyance of real property in the State of New York.

The Trustee making such designation is authorized to fix the compensation to which the Corporate Trustee is entitled for acting as such. The individual Trustee may irrevocably release, reduce, or renounce the power to designate a Corporate Trustee by an acknowledged instrument to that effect filed with the trust records or, if required, filed in a court of competent jurisdiction. Upon qualifying, the Corporate Trustee shall have

22

224 all of the rights and discretions which are granted to any successor Trustee, except those which are specifically denied in this trust. No such Corporate Trustee shall be required to give any bond or security in any court or jurisdiction for acting as such.

Any individual Trustee named in this Article is authorized to amend the administrative provisions of this trust, including provisions relating to any Corporate

Trustee, for the purpose of inducing such Corporate Trustee to accept the appointment.

Such authority shall be exercised by an acknowledged instrument filed with the trust records.

Any individual Co-Trustee then acting, or the income beneficiary or a majority of the income beneficiaries (a beneficiary’s natural or legal guardian being authorized to act on his or her behalf) shall have the right, at any time or from time to time, to remove a then acting Corporate Trustee by delivering to it an acknowledged instrument to that effect. Such removal shall be effective upon delivery of the acknowledged instrument or, where required by law, upon the filing of a copy of the acknowledged instrument with a court of competent jurisdiction. A successor Corporate Trustee (who is not a “related” or “subordinate” party as those terms are used in Section 672(c) of the Internal

Revenue Code, or any successor provision) may then be designated by the individual

Co-Trustee or the income beneficiary or a majority of the income beneficiaries by delivering to that successor an acknowledged instrument to that effect and, where required, by filing a copy of the acknowledged instrument with a court of competent jurisdiction.

23

225 F. Limitation on Individual Trustee’s Power to Make Discretionary

Distributions. Except as otherwise permitted in Section 10-10.1 of the Estates, Powers and Trusts Law of New York, no person who is serving as a Trustee hereunder, shall have any power or discretion, in his or her capacity as a Trustee, nor shall he or she be deemed to be a Trustee (i) with respect to any discretionary payment or application of income and principal to himself or herself or for his or her benefit as a beneficiary of any trust hereunder, or (ii) with respect to any discretionary payment or application of income and principal to or for the use and benefit of any person whom he or she is legally obligated to support in his or her individual capacity, if such payment or application shall constitute the discharge of any part of his or her legal support obligation. The foregoing limitation shall not apply to the withdrawal rights conferred upon Grantor’s children in paragraph A of ARTICLE THREE hereof, inasmuch as these withdrawal rights are exercisable by such trust beneficiaries in their individual capacity and not as a Trustee

G. Failure of Agreement by Co-Trustees. In the event that both an individual

Trustee and a corporate Trustee is in office at the same time with respect to any trust hereunder, and they cannot otherwise agree, the decision of the individual Trustee shall be determinative as to any discretionary distributions of income and/or principal to a beneficiary of such trust and the decision of the corporate Trustee shall be determinative as to the purchase, sale or retention of any asset held by such trust for investment purposes.

24

226 ARTICLE ELEVEN TRUSTEE’S AUTHORITY TO CHANGE SITUS OF TRUST

To the extent permitted by law, the Trustee then in office may change the situs of any trust created by this Agreement for state income tax purposes and also for purposes of trust administration; provided, however, that in no event shall such change adversely affect the interests of the trust beneficiaries.

ARTICLE TWELVE MISCELLANEOUS

A. This Agreement shall be construed and regulated in all respects by the laws of the State of New York.

B. The masculine, feminine or neuter gender and the singular or plural number, shall be deemed to include the other except when otherwise indicated by the context.

C. The term “Trustee” shall be deemed to include any successor Trustee.

D. The terms “children” or “issue” shall be deemed to include adopted children and the term “issue per stirpes” shall be defined in the manner provided in

Section 1-2.14 of the Estates, Powers and Trusts Law of New York.

E. Reference to any statute shall include any successor statute of similar import.

ARTICLE THIRTEEN ACCEPTANCE OF TRUST

The Trustee accepts the Trust herein created.

25

227 IN WITNESS WHEREOF, the parties hereto have executed this instrument on the day and year first above written.

, Grantor

, Trustee

STATE OF NEW YORK ) COUNTY OF MONROE ) SS.:

On the _____ day of ______in the year 20___, before me, the undersigned, personally appeared ______, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her individual capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.

Notary Public

STATE OF NEW YORK ) COUNTY OF MONROE ) SS.:

On the _____ day of ______in the year 20___, before me, the undersigned, personally appeared ______, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her individual capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.

Notary Public

26

228 SCHEDULE A

27

229 230

PITFALLS IN PET PLANNING

by

LENORE S. DAVIS, Esq.

Attorney at Law Woodmere

231

232 Pitfalls in Pet Planning

By: Lenore S. Davis, Esq.

I read in the New York Times section that Barbara Blum had passed away during the same time I was studying Pet Planning. How are they connected?

Barbara Blum was a woman who believed in civil rights. The City of New York used her to break open the doors of the horrific Willowbrook Institute, where the disabled and handicapped were hidden away until death freed them. The story of Willowbrook was revealed by Geraldo Rivera, a reporter who went undercover at Willowbrook and exposed the subhuman conditions endured by its inhabitants. It was the spark that ignited great strides in integration of the disabled and handicapped and others with mental and physical illnesses.

Barbara Blum’s death reminded me that Brown v. The Board of Education1 is just over 60-years old. The Willowbrook expose in 1972 is merely 40 years old. With human civil rights only recently addressed, it is no wonder that it should take further time for the rights of animals to be addressed. But the commonality of disabled humans and pets are that both will always be dependent on others to plan for their care.

At a casual glance, the area of planning for pets appeared to be a very small niche area because the majority of pet owners have someone in their home that could care for a pet, or at the very least, assume ownership and care of the pet if necessary. After initial research, it became clear that the need is much greater than realized: 63% of American households -- or over 100 million households -- own pets. They include 83 million dogs and over 96 million cats.2 The assumption that most pet owners have a relative or friend who could assume the care of a family pet is clearly in error because a significant number of the 4 – 6 million animals euthanized in the United States annually are animals left without care when their owners died. In a 2005 study, 73% of dog owners and 65% of cat owners consider their pets to be akin to a child or other close family member. In 2016, $60 billion was spent by Americans on pet supplies. The pet supply field is expected to continue its great growth.3

Presently, although pets are considered personal property, recent federal afford pets greater rights.4 In addition, state laws contain anti-cruelty statutes and enforcement agencies

1 347 U.S. 483 (1954).

2 The Humane Society of the United States, www.Humanesociety.org.

3 American Pet Products Association, www.Americanpetproducts.org.

4 Endangered Species Act of 1973, 16 U.S.C. 1531-1544, 87 Stat. 884 (1973), as amended – 93-205, approved December 28, 1973(repealing the Endangered Species Conservation Act of December 5, 1969 (P.L. 91- 135, 83 Stat. 275 (1969)). The 1969 Act had amended the Endangered Species Preservation Act of October 15,

1

233 which enforce these animal rights. The State of New York Department of Agriculture and Markets issued Circular 916, effective November 2013, entitled Article 26 of the Agriculture and Markets Law relating to CRUELTY TO ANIMALS, Article 25b, Abandoned Animals, Sections 601 and 602 of the Vehicle and Traffic Law.5

Though an evolution of the statues and of animal rights could be a fascinating separate article, this will focus on the practical side of estate planning for pets.

I. Basic Estate Planning Tools

A. The Need For Pet Care Terms in a Will

Beginning with the first pet-planning gap, i.e., having no specific plan in place at all; most Americans do not have a will in place.6 As stated above, many Americans might assume that a family member or friend will care for the pet when they die. Millions of animals are euthanized as a result.

There is a planning gap when a will is drafted, and there is no specific reference to the pet. Pets are indeed considered personal property.7 Failure to provide specifically for pets would have them pass under a will’s residuary clause. But what would happen if there are several residuary beneficiaries, certainly one cannot split a pet in the event more than one beneficiary desires the pet. Additionally, and more importantly, what if the residuary beneficiary/ies do not want the pet and there is no alternative disposition of the pet.

1966 (P.L. 89-669, 80 Stat. 926 (1966)); the Animal Welfare Act, 7 U.S.C. 54 (1966); and the Marine Mammal Protection Act. (16 U.S.C. Chapter 31 (1972)). See also, Animal Welfare Act, 7 U.S.C. 2143 and Pets Evacuation and Transportation Standards Act of 2006, 42 U.S.C.A. §§ 5196b, 5170b(a)(3)) (West 2008); 152 CONG. REC. H6807 (daily ed. Sept. 20, 2006) (statement by Rep. Shuster) (discussing how the aftermath of Hurricane Katrina uncovered the need to account for household pets and service animals in state and local emergency preparedness plans).

5 N.Y. AGRIC. & MKTS. LAW § 350, et seq.. N.Y. VAT. LAW §601 et seq.

6 www.Rocketlawyer.com

7 See, e.g., CAL. PENAL CODE § 491 (West 1997); MD. ANN. CODE art. 24, § 11-506 (2005); OHIO REV. CODE ANN. § 955.03 (West 1994); W. VA. CODE ANN. § 19-20-11 (LexisNexis 2007); Gluckman v. Am. Airlines, Inc., 844 F. Supp. 151, 158 (S.D.N.Y. 1994) (holding there is no independent cause of action for loss of the companionship of a pet, which is personal property); Mitchell v. Heinrichs, 27 P.3d 309, 313–14 (Alaska 2001) (holding dogs have the legal status of personal property and recovery for the wrongful death of a dog is limited to its market value); Pantelopoulos v. Pantelopoulos, 869 A.2d 280, 284 (Conn. Super. Ct. 2005) (holding the owner of an intentionally killed animal could not recover for emotional distress); Lockett v. Hill, 51 P.3d 5, 7–8 (Or. Ct. App. 2002) (holding the owner of a negligently killed animal could not recover for emotional distress); Carbasho v. Musulin, 618 S.E.2d 368, 371 (W. Va. 2005) (holding sentimental value and emotional distress are not recoverable when a pet is killed because pets are personal property).

2

234 The second problem in not addressing the issue of a pet in a will is that there is no guidance provided to the new owner of the specifics of caring for the pet, e.g., which veterinarian the pet generally uses, what food brands the pet desires, how often and where it is groomed, as well as medical and other information personal to the ’s pet. Lastly, there is a question of what funds are to be used for the benefit of the pet.

Accordingly, the first step for drafting a will for a client with a pet is to include specifics on to whom the pet should be given. The client should be advised at the time of drafting the will to ask whether his intended beneficiary agrees to take the pet and care for it, the same as one might do for a nominated guardian of minor children. The attorney must make clear to the client that even though the beneficiary may acquiesce presently, that person is under no fiduciary obligation to take the pet upon the client’s demise. Accordingly, the attorney and client should set forth terms for a successor caregiver in the will.

B. When There Are No Pet Provisions in a Power of Attorney

There is a clear distinction between a disabled human dependent and a pet, specifically in what happens when the client is not capable of caring for the dependent human or pet, either in the short term, long term, or, in the case of death, permanently. Think of a scenario where Emergency Medical Services is called to a scene and there is a child or a disabled adult at the scene. EMS will likely call the Department of Social Services to take custody of the child or dependent, and find a proper shelter for the child/dependent either temporarily or permanently, as required.

Now think of the above scenario when a pet is involved, assuming the client even has a will. When EMS comes in, they won’t know or even care whether the pet owner has a will. Even if the will is taped to the door for all to see, a will only goes into effect upon a client’s death. At that point in time, the patient might be very much alive; in fact, there may not even be an imminent threat of death, so any provisions for pet care in a will does not address any immediate need.

EMS or the might take custody of a friendly pet, but only for a short period of time. First, the animal shelter will determine if there are friends or relatives prepared to step forward and care for the pet on behalf of the pet owner. If no one steps forward after the first few days, the animal shelter might have the ability to find someone else who would care for the pet either short term, long term or permanently. But, depending on the shelter’s capacity, it is likely that after a few weeks, if no one claims the pet, the pet will be euthanized. So, if the client made no provisions for the pet in the event of disability, and he recovers weeks later, he could discover that his pet was euthanized during the term of his illness.

II. Filling in the Gaps: Power of Attorney and Inter-vivo Pet Trusts

3

235 Attorneys who address only the pet issue on a limited basis through wills have permitted a huge gap in coverage for their client’s pets. Having only a testamentary pet trust, or a trust which is contained in a will, leaves a gaping hole in pet planning for it can take months, if not years, to probate or administer an estate, receive letters testamentary and letters of trusteeship, and during this period of pendency, the pet will be without coverage as to its physical care and money to cover its care. Without a representative of an estate to take possession of the pet, the pet’s care will be in limbo.

How to fill these gaps? The one-two punch: a provision in power of attorney, and the drafting of an inter-vivos pet trust. A provision in a power of attorney that the agent should arrange for pet care and custody is the first step in ensuring that the pet is cared for when a client is alive but unable to care for his pet, or communicate to whom the pet should be given.

The power of attorney in and of itself is insufficient. It is an inappropriate place to set forth the details for the care and maintenance of the pet. The attorney in fact’s job would purely be to transfer the pet to the caretaker of his choosing, or, if there is an inter vivos trust, custodian set forth in an inter vivos trust. The inter vivos pet trust is a fairly new estate-planning tool. The concept began as a so-called “” because in old trusts there were no means to enforce the terms of the trust for the benefit of a pet, a “beneficiary” that obviously did not have access to the courts to enforce its rights against the trustees. The trustee was part of an honor system where he was trusted to carry out the terms of the trust for the benefit of the pet, but could not be legally forced to do so.

As the concept evolved through the legal system and state statutes, there are now provisions that may be placed in pet trusts for enforcers or those who have the ability to bring the custodian or trustee to court to force him to carry out the terms of the trust for the benefit of the pets.

New York has a pet trust statute. EPTL 7-8.1(a) provides that any individual may intervene for the benefit of the pet, and the court, sua sponte, may appoint someone to enforce the terms of the trust.8 This same section also creates an exception to the rule-against- perpetuities problem in estate planning, which would have forced the pet trust to terminate 21 years after the death of a life in being, . Under the EPTL, the trust shall terminate only when all animal beneficiaries of the trust are no longer alive.9 The trust names a trustee to manage the funds of the trust, a caretaker who has physical custody of the pet, and an enforcer.

8 N.Y. EPTL 7-8.1(a).

9 Id.

4

236 A pet trust, like any other trust, is a contract between the Grantor and the Trustee. The Grantor agrees to fund the trust and sets forth certain terms, and the Trustee agrees to carry out the terms set forth in the trust. Necessary Terms for a pet trust:

1. The Grantor; 2. The Trustee and successor trustee; 3. A description of the pets who are beneficiaries of the trust; 4. Name of alternate beneficiary/ies who take after all the pet/beneficiaries die; 5. Custodian of the pet, the person who has physical custody of the pet. It can be the trustee, or it may be someone else, and successor custodian of the pet. 6. Suggested terms for care of the pet: a. Brand name of pet food and snacks, how often the pet is provided with food and snacks; b. Any medical prohibitions or allergies; c. Set forth any medical conditions the pet might have; d. Name of vet, address and phone number; e. Name of grooming company, address and phone number, how often the pet gets groomed; f. Where the dog can board if the custodian goes on vacation.

Having the triumvirate of power of attorney, inter vivos trust and will with provisions for pets, the client will ensure a continuum of care for a pet for the term of its life.

What happens, though, if the client does not have an individual whom he can trust with his pet? In more recent years, there are veterinarian schools and other pet-oriented institutions that have pre-planning programs for pets. A pet owner contacts the organization and pays to have the pet picked up in the event the owner becomes disabled or dies. There is a better chance that an old organization in good standing will be available for a pet than one person, who can change his mind, or die or become disabled himself.

Some of the better organizations have a planned-giving department that customizes solutions for clients and charge accordingly. The most frequent solutions are ones where the organization is called when the client becomes disabled or dies, it arranges for the pet’s transportation to a pet facility where either the pet lives for the remainder of its life, or is adopted out.

III. The Funding Gap/Tax Considerations of Pet Trusts

A. Funding an inter-vivos trust. I must start off stating that one SHOULD NOT fund an inter vivos trust with death benefits, e.g., life insurance proceeds, pension proceeds or other funds that first become available after a person’s death. An inter vivos trust should be funded with cash or cash equivalents, because it is an emergency standby account that needs to be operable at any given moment with very little notice.

5

237 For instance, if a pet owner has a heart attack or stroke, and is taken to the hospital, the attorney in fact under a power of attorney will transfer the pet to the custodian set forth in the pet trust. The custodian will have to immediately use those funds to purchase supplies for the pet and care for the pet. The care could be short term, long term or permanent as the case unfolds. Therefore, the inter-vivos fund has to be funded immediately upon creation.

B. Funding a testamentary trust A testamentary trust may be funded with life insurance proceeds, for in all likelihood it takes very little time to get a life insurance company to pay death benefits. It generally takes a much longer time to probate a will. The problem with life insurance policies, is that many times an executor will not know where to find the insurance policy to make a claim. If the decedent/testator was older when he died, the insurance policy could have expired, or might have been a term insurance policy that expired. If the heirs are fighting, they might not focus on claiming the life insurance proceeds.

Real estate is not a reasonable asset for funding a pet trust, for it is not liquid and may some time to liquidate to gain the money necessary to care for the pet immediately. Once again, we are looking for cash or liquid assets, or assets that may easily be converted into cash.

Beware that, unlike any other trust, a pet trust may not be overfunded, i.e., a grantor may not fund a pet trust in excess of what it would reasonably take to care for the pet(s) covered.10

Lastly, estate planning is more complicated for pets because under tax laws, pet beneficiaries are treated differently than human beneficiaries. Starting with definition of person, which does not include pets.11 To cite just two examples, one a trust specifically for the benefit of pets, and the other a charitable remainder trust (CRAT).

Pets are not considered “persons” under Rev. Rul. 76-48612, which states:

IRS HEADING Trust for care of pet animal. In the absence of a state law to the contrary, a bequest in trust to provide for the care of a decedent's pet animal is void from its inception, and unless otherwise indicated in the will or specified by statute, the trust property passes to the residuary and income earned on such property is includible in the income of such legatee.

10 N.Y. EPTL 7-8.1(d).

11 IRC section 7701(a)(1)

12 Rev. Rul. 76‐486, 1976‐2 C.B. 192

6

238 In jurisdictions where such a trust is not invalid, it is subject to the imposition of the tax of section 1(d) of the Code pursuant to section 641 and no deductions are allowable for distributions under sections 651 and 661.

This makes sense considering that trust income has to be taxed to a person or entity. A simple trust is one where all the income is currently distributed to beneficiaries. The beneficiaries are issued a K-1 and the beneficiaries include the income in their own income tax returns. The trust gets a deduction for distributions paid [and for which the beneficiary will pay income tax], otherwise the same income would be taxed twice.

A complex trust is one where there is no mandatory distribution of all the current income. As a result, if there is trust gross income greater than $600 in one year, the trustee must file a 1041 and pay taxes on said income. The tax rates for trusts are compressed, i.e., the brackets of income require greater tax rates at lower income amounts.

Now we can understand why a pet trust cannot get a tax deduction for distributions made for the benefit of a pet, and why pet trusts are considered complex trusts. A pet is not an entity that pays taxes. A trust cannot issue a pet a K-1. Therefore, all income received by the trust must be paid by the trust, as a complex trust, at compressed tax rates.

Other examples of disadvantaged tax rules for pets are the rules and regulations governing charitable remainder trusts (CRATS). Often, a client would like to fund a trust for the benefit of his pet, and would like the remainder to go to charity. If the trust income were for the benefit of a human beneficiary, the grantor could count on some kind of charitable deduction; not so with trusts for the benefit of pets. Under Revenue Ruling 78-105: “no portion of the amount passing to a valid trust for the lifetime benefit of a pet qualifies for the charitable estate tax deduction, even if the remainder beneficiary is a qualifying charity” because pet is not a “person.”

It is important for attorneys to know that they must advise clients to plan for their pets. It is equally important for the estate-planning attorney to know where the hidden gaps and traps lie, and to help the client navigate the estate-planning course to ensure that all dependents, including pets, are cared for in the event of a client’s disability or death.

Lenore Davis has been a Trust and Estate/Elder Law attorney in New York and New Jersey for over twenty years. She has her L.L.M in Tax and is an adjunct professor at New York Law School’s Graduate Tax Program. She can be reached at [email protected]

7

239 240 Until Death Do Us Part‐ Pets and Estate Planning

LENORE S. DAVIS, P.C. [email protected] April 2017 ©Lenore S. Davis, P.C.

241 242 Background

• Trusts 20 years ago, trusts today. Awareness. • Pet Trusts Not Viable 20 years ago. Why now? • Barbara Blum Willowbrook. Evolution of rights for slaves, minorities= human civil rights. • Respect for pets • Respect for the environment • All fairly new concepts

243 Background continued

• 63% American households own pets. • Over 100mm household have at least one indoor pet, including: – 65mm dogs and over 77mm cats • People assume that a relative or friend will assume care of pet yet a significant number of the 4mm‐ 6mm of the euthanized animals in the U.S. are animals left without care when their owners die.

244 Emotional Bond

• Bringing animals from outside utilitarian farm purposes to companion pets and service animals. They are responsive living beings, not mere personal property as other tangible personal property. • Zander the husky as an example.

245 Legal Status

• Presently although pets are considered personal property, recent statutes afford pets greater rights as in the Federal statutes: • Endangered Species Act; • The Humane Care of Animals Act; • Animal Welfare Act; and • Marine Mammal Protection Act. • State Laws contain anti‐cruelty statutes and enforcement agencies which enforce these animal rights

246 Caring For Pets

• In 2015, over $60bb was spent by Americans on pet supplies. Reveals closer ties between people and their pets and a desire by pet owners to ensure that a certain standard of care is maintained for the pet in the event of death or disability by pet owner. • Before the awareness by the legal community, pet owners concerned with what would happen to their pets, felt they had no choice but to euthanize their pets for fear of their pets being held in inhumane conditions or used as pets for scientific experiments. In re Capers Estate

247 Planning For Pets

• Estate of Thelma L. Russell. Cant leave money outright to pets, they are not legal beneficiaries. • Leona Helmsley: $12mm for her maltese, excluding two of her grandchildren • Estimated: Between 12‐27% of pet owners provide for pets in their estate plans. • Owners typically leave $10k‐$35k for the care of their pets

248 Issues With Planning in Wills Alone

• Doesn’t consider what happens to owner while still alive but unable to care for pet • If terms are not set forth in detail, pet treated like other property in residuary with no details as to care of pet • No idea if recipient agrees to care for pet or has enough resources to care for pet • If there is a delay in probate of will, who cares for the pet in the interim

249 Will Issues Continued

• If provision to give pet to pet retirement home: • What if home closes in the interim or at some point while caring for pet • Less one‐on‐one pet interaction • Once the estate has been administered and closed, there are no provisions to ensure pet properly cared for

250 Filling in the Gap for Will Planning • Will takes effect on death, if there is disability, want to ensure there is a provision in power of attorney for the care of the pet, on a short term basis and long term basis • Must ensure that attorney in fact has sufficient funds to care for the pet • What happens between death and probate, a matter of weeks or months. • Stop‐gap contract between caregiver and client to care for pet, pending probate and complete transfer of “title” to pet.

251 Filling the Gap, continued

• Ensure that client’s pet has tags on it which states the vet’s name/number or that of attorney in fact • Have client place on her refrigerator door a piece of paper with large lettering stating CARE FOR MY PETS so that EMS would know the name and number of attorney in fact • Have paper in wallet with the name/number of attorney in fact or executor.

252 Honorary Trusts: First Evolutionary Step to Pet Trusts • Honorary so called because pets cannot go to court to enforce their rights under the trust, no one else has standing • If Trustee choses not to effectuate the trust, the funds belong to said Trustee. I give $$ to Fred Smith to care for my pet. Language precatory, money goes to Fred. • Rule against perpetuity problem, life in being plus 21 years, pets may not be used as a measuring life

253 2‐ 907

• [Section 2‐907. Honorary Trusts; Trusts for Pets. • • (a) [Honorary Trust.] Subject to subsection (c), if (i) a trust is for a specific lawful noncharitable purpose or for lawful noncharitable purposes to be selected by the trustee and (ii) there is no definite or definitely ascertainable beneficiary designated, the trust may be performed by the trustee for [21] years but no longer, whether or not the terms of the trust contemplate a longer duration. • (b) [Trust for Pets.] Subject to this subsection and subsection (c), a trust for the care of a designated domestic or pet animal is valid. The trust terminates when no living animal is covered by the trust. A governing instrument must be liberally construed to bring the transfer within this subsection, to presume against the merely precatory or honorary nature of the disposition, and to carry out the general intent of the transferor. Extrinsic evidence is admissible in determining the transferor's intent. • (c) [Additional Provisions Applicable to Honorary Trusts and Trusts for Pets.] In addition to the provisions of subsection (a) or (b), a trust covered by either of those subsections is subject to the following provisions: • (1) Except as expressly provided otherwise in the trust instrument, no portion of the principal or income may be converted to the use of the trustee or to any use other than for the trust's purposes or for the benefit of a covered animal. • (2) Upon termination, the trustee shall transfer the unexpended trust property in the following order: • (i) as directed in the trust instrument; • (ii) if the trust was created in a nonresiduary clause in the transferor's will or in a to the transferor's will, under the residuary clause in the transferor's will; and (iii)if no taker is produced by the application of subparagraph (i) or (ii), to the transferor's heirs under Section 2‐711. • (3) For the purposes of Section 2‐707, the residuary clause is treated as creating a future interest under the terms of a trust. • (4) The intended use of the principal or income can be enforced by an individual designated for that purpose in the trust instrument or, if none, by an individual appointed by a court upon application to it by an individual. • (5) Except as ordered by the Court or required by the trust instrument, no filing, report, registration, periodic accounting, separate maintenance of funds, appointment, or fee is required by reason of the existence of the fiduciary relationship of the trustee. • (6) A Court may reduce the amount of the property transferred, if it determines that that amount substantially exceeds the amount required for the intended use. The amount of the reduction, if any, passes as unexpended trust property under subsection (c)(2). • (7) If no trustee is designated or no designated trustee is willing or able to serve, a Court shall name a trustee. A Court may order the transfer of the property to another trustee, if required to assure that the intended use is carried out and if no successor trustee is designated in the trust instrument or if no designated successor trustee agrees to serve or is able to serve. A Court may also make such other orders and determinations as shall be advisable to carry out the intent of the transferor and the purpose of this section.]

254 Uniform Trust Code

• SECTION 408. TRUST FOR CARE OF ANIMAL. • • (a) A trust may be created to provide for the care of an animal alive during the settlor's lifetime. The trust terminates upon the death of the animal or, if the trust was created to provide for the care of more than one animal alive during the settlor's lifetime, upon the death of the last surviving animal. • (b) A trust authorized by this section may be enforced by a person appointed in the terms of the trust or, if no person is so appointed, by a person appointed by the court. A person having an interest in the welfare of the animal may request the court to appoint a person to enforce the trust or to remove a person appointed. • (c) Property of a trust authorized by this section may be applied only to its intended use, except to the extent the court determines that the value of the trust property exceeds the amount required for the intended use. Except as otherwise provided in the terms of the trust, property not required for the intended use must be distributed to the settlor, if then living, otherwise to the settlor's successors in interest.

255 Compare UPC v. UTC

UPC UTC • Excess Funds: Trust, • Settlor, Settlor’s Will, Heirs successors in • Permits Honorary interest Trusts as well as pet • Doesn’t address trusts for states that Honorary Trusts have not enacted • Any person with an statutes. interest in the • Interested parties welfare of the pet may petition the may petition the court only if the court to enforce the trust is silent as to trust or remove a who has standing to person already enforce appointed

256 EPTL 7‐8.1 Pet Trusts

• (a) A trust for the care of a designated domestic or pet animal is valid. The intended use of the principal or income may be enforced by an individual designated for that purpose in the trust instrument or, if none, by an individual appointed by a court upon application to it by an individual, or by a trustee. Such trust shall terminate when the living animal beneficiary or beneficiaries of such trust are no longer alive. • • (b) Except as expressly provided otherwise in the trust instrument, no portion of the principal or income may be converted to the use of the trustee or to any use other than for the benefit of all covered animals. • • (c) Upon termination, the trustee shall transfer the unexpended trust property as directed in the trust instrument or, if there are no such directions in the trust instrument, the property shall pass to the estate of the grantor. • • (d) A court may reduce the amount of the property transferred if it determines that amount substantially exceeds the amount required for the intended use. The amount of the reduction, if any, passes as unexpended trust property pursuant to paragraph (c) of this section. • • (e) If no trustee is designated or no designated trustee is willing or able to serve, a court shall appoint a trustee and may make such other orders and determinations as are advisable to carry out the intent of the transferor and the purpose of this section.

257 Federal Tax Provisions

• Rev. Rul. 76‐486: “The term "beneficiary," for purposes of Part I, subchapter J, of the Code, is defined in section 643(c) to include heirs, , and devisees. Heirs, legatees, and devisees are persons. See 96 C.J.S. Wills, section 1097 (1957). For purposes of the Code…the term "person" is construed to mean and include an individual, trust, estate, partnership, association, company or corporation. Section 7701(a). Since animals do not fall within this category, they cannot be beneficiaries for purposes of section 643(c).” • Revenue Ruling 76‐486: “an enforceable pet trust established under a state statute would be taxed on all of its income, regardless of any distributions made for the benefit of the pet beneficiary.” The pet trust is taxed as a complex trust that has not made any distributions. • Revenue Ruling 78‐105: “no portion of the amount passing to a valid trust for the lifetime benefit of a pet qualifies for the charitable estate tax deduction, even if the remainder beneficiary is a qualifying charity” because pet is not a “person.” • No Annual Exclusion Allowance

258 Critique of Tax Provisions

• There is no annual exclusion allowance • Income taxed at trust rates not individual rate, more compressed rates and starts at first cent • No allowance deductions for distributions to pets • Does it make sense to work around these negatives by merely giving the money to an individual together with the pet, trusting that he will care for the pet with the money provided: I give my cat to Sam together with the sum of $25,000. Can’t force Sam to care for cat, gets to keep the money regardless, but if inter vivos trust, can use annual exclusion, since the beneficiary is a person and not an animal.

259 Critique continued

• Paramount is the idea that the funding is generally de minimus [otherwise, court would ensure excess goes to contingent benef.] • Assuming $40k principal, generally, in this environment, 4% return = $1,600/year, 15% tax is $240/year. Litigation would not pay. • Argument: Income which benefits a human being should be taxed to said person. The income used by caregiver is a benefit to caregiver in that the caregiver then does not have to take money out of his pocket to care for pet. • Counter: Not a benefit to caregiver in that may not have taken pet but for the money which covers the pet’s care. If caregiver not contingent beneficiary, then surely no personal benefit, benefit merely to beneficiary/pet.

260 Mandatory Provisions

• Settlor • Beneficiaries • Alternate/Successor Beneficiaries • Trustee • Custodian • Funding provisions

261 Suggested Provisions

• Successor Beneficiaries • Successor Trustees • Successor Custodians • Terms of care for your pet, specifics on vet care, favorite food, amount of exercise, usual habits, health condition/medication, boarding or pet‐sitting • Directions and circumstances for euthanizing the pet • Provisions for the pet’s remains

262 Funding Pet Trusts

• Major recurring error: funding with life insurance policy or annuity • Over funding • Ensuring sufficient funds for payment of accountant, commission and taxes

263 Finally, Capers Estate

"The best friend a man has in the world may turn against him and become his enemy. His son or daughter that he has reared with loving care may prove ungrateful. Those who are nearest and dearest to us, those whom we trust with our happiness and good name, may become traitors to their faith… "The one absolutely unselfish friend that a man can have in this selfish world, the one that never deserts him, the one that never proves ungrateful or treacherous, is his dog. "Gentlemen of the , a man's dog stands by him, in prosperity and poverty, in health and sickness. He will sleep on the cold ground, where the wintry wind blows and the snow drives fiercely if only he may be near his master's side. He will kiss the hand that has no food to offer; he will lick the wounds and sores that come in encounter with the roughness of the world. He guards the sleep of his pauper master as if he were a prince… “… and when the last scene of all comes and death takes the master in its embrace and his body is laid away, there by his graveside will the noble dog be found, his head between his paws, his eyes sad but open in alert watchfulness, faithful and true even unto death."

264

TRUST AGREEMENT

Between

NAME OF OWNER,

as Settlor, and

NAME OF TRUSTEE, as Trustee

Dated: AUTOMATIC

LENORE S. DAVIS, PC 125 Linden Street Woodmere, New York 11598 (516)569-4671

1

265

PET TRUST

THIS AGREEMENT made and entered into this AUTOMATIC DATE , between NAME OF PET OWNER, Settlor, residing at PET OWNER’S ADDRESS, (hereinafter referred to as the "Settlor") and NAME OF TRUSTEE(S), residing at ADDRESS OF TRUSTEE (hereinafter sometimes referred to as the "Trustee”).

W I T N E S S E T H:

WHEREAS, the Settlor desires to create a Trust to hold such property itemized and described in "Exhibit A" attached hereto and made a part hereof, together with such monies, securities and other assets as the Trustee may hereafter at any time hold or acquire hereunder (said monies, securities and other assets, being hereinafter referred to collectively as the "Trust Estate") for the purposes hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Settlor agrees to execute such further instruments as shall be necessary to transfer said property to the Trust and the Trustee agree to hold the Trust Estate for the following uses and purposes and subject to the terms and conditions hereinafter set forth:

ARTICLE I. GENERAL PROVISIONS

(1) ADDITIONS TO CORPUS

The Settlor with written notice to the Trustee may add from time to time to the Trust Estate any property outright, by deed or Will or otherwise. The Settlor further grants to other persons the power to add additional properties to this Trust, subject to acceptance by the Trustee.

(2) LAWS GOVERNING

The Settlor is currently a resident of the State of STATE OF OWNER’S RESIDENCE, and all questions pertaining to the validity, construction, effect and administration of this Agreement shall be determined by and in

2

266 accordance with the laws of STATE OF OWNER’S RESIDENCE. In the event STATE OF OWNER’S RESIDENCE does not recognize Pet Trusts, then the Trustee named herein shall do one of the following: 1. Move the situs of this Trust to a State that does provide for Pet Trusts, and have the Trust governed by said state; or 2. Terminate the Trust and hold the money for the benefit of my beneficiaries set forth in Schedule B. I understand that there will be no legal terms to govern the Trustees’ actions, but trust that said Trustee will follow my wishes set forth herein.

The situs of the property of any Trust created hereunder may be maintained in any jurisdiction, in the absolute discretion of the Trustee, and thereafter transferred at any time to any other jurisdiction selected by the Trustee. Upon any such transfer of situs, the Trust Estate may thereafter, at the election of the Trustee of said Trust, be administered exclusively under the laws of (and subject, as required, to the exclusive supervision of the courts of) the jurisdiction to which it has been transferred. Accordingly, if the Trustee of any Trust created hereunder elects to change the situs of any such Trust, the Trustee shall hereby be relieved of any requirement of having to qualify in any other jurisdiction and of any requirement of having to account in any court of such other jurisdiction.

(3) NAME OF TRUST

This Trust shall be known as the "NAME OF PET OWNER PET TRUST" and it shall be sufficient that it be referred to as such in any deed, assignment, bequest or devise.

(4) TRUST REVOCABLE

This Trust is hereby declared to be revocable and Settlor may at any time amended, alter or modify this Trust in any manner. Upon Settlor’s death, this Trust shall become irrevocable.

(5) FAMILY PET MEMBERS/BENEFICIARIES

Schedule B attached hereto, contains the names and types of pets I presently have. It shall be amended from time to time as necessary to include all my pets. These pets shall be referred to herein as my Beneficiary/Beneficiaries.

ARTICLE II.

3

267 DISPOSITION OF TRUST ESTATE DURING SETTLOR'S LIFETIME

The Trustee shall hold, manage, invest and reinvest the Trust Estate, and shall pay or apply the income and principal of the Trust Estate in the following manner:

(1) DISTRIBUTION OF INCOME AND PRINCIPAL

(a) INCOME DISTRIBUTIONS: During the lifetime of the Settlor, the Trustee, in the Trustee’s sole and absolute discretion, may (i) pay from time to time all or part of the net income from the Trust Estate, to or for the benefit of Settlor’s beneficiaries (ii) accumulate said income as part of the Trust Estate.

(b) PRINCIPAL DISTRIBUTIONS: During the lifetime of the Settlor, the Trustee shall pay as much of the principal from the Trust Estate as the Trustee shall deem proper, in the Trustee' sole discretion, to or for the health, support or maintenance of Settlor’s beneficiaries.

(c) RESIDENTIAL REAL PROPERTY: In the event that this Trust holds residential real property (including condominiums or the shares of a cooperative apartment) used by the Settlor, then Settlor shall have the exclusive right to occupy and use the said real property (including a cooperative apartment) for residential purposes. The Settlor shall not be required to pay rent for such property, but shall be responsible for and required to pay all of the expenses of the maintenance of the property, including taxes, insurance, utilities, mortgage payments and normal costs of maintenance and upkeep of the property. Upon Settlor’s death, Trustee shall have discretion as to whether to sell the residence or maintain the residence for the benefit of my beneficiaries. Upon the death of all of my beneficiaries, my residence shall be sold, and the net proceeds added to my residuary set forth below in Article IV.

(d) NO PRINCIPAL OR INCOME TO THE TRUSTEE. In no event shall income or principal of this trust pass to the Trustee of this Trust.

ARTICLE III. COORDINATION WITH THE ESTATE OF SETTLOR

4

268

The property herein shall not be used for estate expenses or taxes, to pay estate creditors or any other personal debts or expenses of the Settlor or her spouse.

ARTICLE IV. DISPOSITION OF TRUST ESTATE UPON DEATH OF SETTLOR

(1) DISTRIBUTION UPON DEATH

Upon the death of the Settlor, the Trustee shall continue this Trust under the terms hereunder for the benefit of all my pets, as set forth in Schedule B. The Trustee shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of the beneficiary, so much (even to the extent of the whole) of the net income and/or principal of this Trust as the Trustee shall deem advisable, in his/her/their sole and absolute discretion. The Trustee shall add to the principal of such Trust the balance of net income not so paid or applied.

Upon the death of my last pet, the corpus of this trust and any accumulated income shall pass to ALTERNATE DISPOSITION. In the event there is no alternate disposition, the corpus and accumulated income shall pass to my heirs at law.

(2) MISCELLANEOUS PROVISIONS (if any)

SPECIAL CARE INSTRUCTIONS

ARTICLE V. PROVISIONS RELATING TO THE TRUST ESTATE

(1) ENFORCER

I hereby appoint NAME OF ENFORCER to be my enforcer herein. He/She shall have the right to enforce the terms of this trust in a Court of Law and ensure the safety, health and maintenance of my beneficiaries.

(2) CUSTODIAN

5

269

I hereby appoint NAME OF CUSTODIAN custody of my beneficiaries. He/She shall provide for the health, maintenance and support of my pets. She is to take them to a veterinarian at annually. In the event NAME OF CUSTODIAN shall fail or cease to serve hereunder for any reason whatsoever, I hereby appoint NAME OF SUCCESSOR CUSTODIAN as my successor CUSTODIAN as though originally appointed by me.

ARTICLE VI. POWERS AND DUTIES OF TRUSTEE

(1) INVESTMENTS

(a) The Trustee hereunder (including any Successor Trustee) shall have the continuing, absolute and discretionary power to deal with any property, real or personal, held in such Trust(s). Such power may be exercised independently and without the prior or subsequent approval of any court or judicial authority, and no person dealing with such Trustee shall be required to inquire into the propriety of any of the actions of such Trustee. The Trustee shall not be limited to the type and character of investments in which he may invest the funds of this Trust, so long as the Trustee use reasonable prudence and judgment in the selection of investments. The Trustee shall have the following general powers, in addition to, and not by way of limitation of, the powers provided by Section 11-1.1 of the New York Estates, Powers and Trusts Law:

1. To retain any property contributed by the Settlor, so long as such retention appears advisable, and to exchange any such property for other properties and to retain such items received in exchange. The Trustee may presume that the Settlor has confidence in the property owned by the Settlor and added to the Trust Estate, and, therefore, no sale thereof shall be made solely in order to diversify investments or to convert said asset to income producing property.

2. To retain such property for any period, whether or not the same is of the character permissible for investments by fiduciaries under any applicable law, and without regard to any effect the retention may have upon the diversification of the investments.

3. To borrow monies with security upon such terms as to rate and maturity and in other respects as the Trustee may deem proper, and to secure the repayment of any and all amounts so borrowed by mortgage

6

270 or pledge of any property. All such payment(s), including any Trustee' fees incurred by reason of such payments, shall be charged generally against and made from the Trust Estate; provided, however, that no such payment shall be made from the proceeds of any qualified pension or profit sharing plan received by the Trustee.

4. To lease, with or without consideration, any such property beyond the period fixed by statute for leases made by a Trustee and beyond the duration of the Trust Estate or any Trust created hereunder.

5. To invest any part or the entire principal of the Trust Estate in any common trust fund, legal or discretionary, which may be established and operated by and under the control of the Trustee.

6. To improve real property and to pay the cost out of principal.

7. To permit any person having an interest in the income of the Trust to occupy real property upon such terms as the Trustee deem proper, whether rent free or for the payment of taxes, insurance, maintenance and ordinary repairs, or other expenses.

8. To sell, transfer, exchange, convert or otherwise dispose of, or grant options with respect to any security or property, real or personal, held in any Trust fund hereunder at public or private sale, with or without security, in such manner, at such time or times, for such purposes, for such prices and upon such terms, credits and conditions as the Trustee may deem advisable.

9. To allocate in the Trustee sole discretion, in whole or in part, to principal or income, all receipts and disbursements for which no express provision is made hereunder, which allocation shall fully protect the Trustee with respect to any action taken or payment made in reliance thereon.

Notwithstanding the above, in no event shall the Trustee adjust between income and principal if such adjustment would cause any public benefit program to consider the adjusted principal or income to be an available resource or available income or if such adjustment would otherwise supplant any governmental benefit that any beneficiary is entitled to receive.

The Trustee shall administer this Trust according to its terms even if such terms conflict with New York Estates Powers and Trusts Law §11- 2.3(b)(5)(A) as amended.

7

271 10. A Trustee shall not have the power to elect the optional uni-trust provisions as created under New York Estates Powers and Trusts Law §11-2.4.

11. If the Settlor ceases to occupy and use real property as a residence under Article II for a period of ninety (90) consecutive days, the Trustee may, in the exercise of absolute discretion, either continue to hold such property or sell it. Notwithstanding, any purchaser of real property owned by the Trust will be entitled to rely upon the authority of the Trustee to sell such real property.

12. If there is more than one Trustee hereunder, they are empowered to act jointly or severally as to the above powers, including but not limited to transactions with financial institutions and banks.

ARTICLE VII. PROVISIONS RELATING TO TRUSTEE

(1) COMPENSATION

The Trustee shall be entitled to receive a statutory commission for services rendered hereunder as provided for under New York law and shall also be reimbursed for all reasonable expenses incurred in the management and protection of the Trust Estate and travel and lodging expenses to and from the Trustee residence and the residence of the Settlor as frequently as the Trustee determine in the Trustee’s sole discretion.

(2) BOND

No bond or other security shall be required of any non-corporate Trustee.

(3) HOLD HARMLESS

8

272 No Trustee shall be liable or responsible for any loss or damage arising by reason of any act or omission to or by the Trustee or in connection with any activities carried out under this Trust, except for the Trustee's own gross negligence, willful neglect or unlawful act.

ARTICLE VIII. TRUSTEES

(1) APPOINTMENT OF SUCCESSOR TRUSTEES

(a) The initial Trustee shall be NAME OF TRUSTEE. In the event NAME OF TRUSTEE shall fail or cease to serve hereunder for any reason whatsoever, NAME OF SUCCESSOR TRUSTEE shall be successor Trustee as if originally appointed hereunder.

ARTICLE IX. MISCELLANEOUS

(1) PERPETUITIES SAVINGS PROVISION

If NAME OF STATE has a provision for Rules Against Perpetuities, then this Trust shall terminate at the sooner of all my pets’ deaths, or all Trusts created herein shall terminate no later than 21 years after the death of all of Settlor's descendants living on the date of this Agreement and, if any Trust shall so terminate, all property then belonging to the income or principal shall be distributed to the Trustee herein for the benefit of beneficiary(s) named herein free of Trust.

(2) HEADINGS AND USAGES

The paragraph headings used are for convenience only and shall not be resorted to for interpretation of this Trust. Wherever the context so requires, the masculine shall include the feminine and neuter and the singular shall include the plural.

9

273 (3) VALIDITY OF PROVISIONS

If any portion of this Trust is held to be void or unenforceable, the balance of this Trust shall nevertheless be carried into effect.

IN WITNESS WHEREOF, NAME OF PET OWNER, Settlor, and NAME OF TRUSTEE, Trustee, have signed and sealed this Trust Agreement.

______

NAME OF PET OWNER, Settlor

______

NAME OF TRUSEE, Trustee

10

274

STATE OF ) : s.: COUNTY OF )

On AUTOMATICE DATE, before me, the undersigned personally appeared NAME OF PET OWNER, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his capacity, and that by his/her signature on the instrument, the individual, or the person on behalf of which the individual acted, executed the instrument.

______Notary Public

STATE OF ) : s.: COUNTY OF )

On AUTOMATIC DATE, before me, the undersigned personally appeared NAME OF TRUSTEE, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person on behalf of which the individual acted, executed the instrument.

______Notary Public

11

275 SCHEDULE A TO THE NAME OF PET OWNER PET TRUST

DATED:

(Description of Assets Contributed to the Trust)

Receipt of the above listed items is hereby acknowledged by:

______NAME OF TRUSTEE, Trustee

DATED: ______

______WITNESS

12

276 SCHEDULE B LIST OF BENEFICIARIES (Please provide name of pet, what kind of animal and description) (Should be updated every time you adopt a new pet or a pet passes away)

13

277 278

JOHN DOE TRUST

SAMPLE THIRD PARTY TRUST

by

Elizabeth Forspan, Esq. Ronald Fatoullah & Associates Great Neck

279

280 JOHN DOE TRUST SAMPLE THIRD PARTY TRUST

THIS TRUST AGREEMENT made and entered into this ____ day of January, 2017, between JANE DOE, Grantor, with address at ______(hereinafter referred to as the “Grantor”), and JANE DOE, Trustee, residing at ______(hereinafter referred to as the “Trustee”).

WHEREAS, the Grantor desires to provide for the supplemental needs of JOHN DOE (hereinafter sometimes referred to as “JOHN”) by placing assets into this Trust to be held by the Trustee as part of the Trust Estate (said monies being hereinafter referred to collectively as the “Trust Estate”) for purposes hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Trustee agrees to hold the Trust Estate, IN TRUST, NEVERTHELESS, for the following uses and purposes and subject to the terms and conditions hereinafter set forth:

ARTICLE 1 GENERAL PROVISIONS

(1) LAWS GOVERNING. This Agreement shall be construed and regulated in all respects by the laws of the State of New York. This Trust Agreement shall be interpreted and the administration of the Trust shall be governed by the laws of the State of New York; provided, however, that Federal law shall govern any matter alluded to herein that shall be related to or involve government entitlements such as SSI, Medicaid and or other federal benefit programs.

(2) NAME OF TRUST. This Trust shall be known as the “JOHN DOE TRUST” and it shall be sufficient that it be referred to as such in any deed, assignment, bequest or devise.

(3) PURPOSE. 1. This Trust is created expressly for the sole benefit of JOHN DOE. This Trust is to enable JOHN DOE to qualify or continue to qualify for medical assistance under the Medicaid program as provided for by the Omnibus Budget Reconciliation Act of 1993 ( “OBRA 1993”). In the administration of the Trust, the Trustees shall undertake all acts necessary to establish and maintain JOHN DOE’s eligibility for medical assistance under the Medicaid program.

(4) TRUST IRREVOCABLE. This Trust is hereby declared to be irrevocable and it shall not at any time, by any person or persons, be amended, altered or modified in any manner.

Notwithstanding the above to the contrary, in the event that the Trust Estate is challenged or faces imminent invasion by any governmental department or agency in such a way as to affect JOHN DOE's eligibility for benefits available under any governmental program, the Trustee or a Court of competent jurisdiction is empowered to amend this Trust so as to maintain JOHN DOE's eligibility for benefits under such governmental program.

1 281

(5) FAMILY MEMBERS. At the time of the execution of this Trust, JOHN DOE’s Family consists of:

LIST FAMILY MEMBERS

(6) ADDITIONS TO CORPUS. Grantor, with written notice to the Trustee, may add from time to time to the Trust Estate any property by deed, Will or otherwise. In no event can JOHN DOE add his own assets to the Trust Estate.

ARTICLE II DISTRIBUTION OF INCOME AND PRINCIPAL DURING LIFETIME OF JOHN DOE

The Trustee shall hold, manage, invest and reinvest the trust share for JOHN DOE's benefit, as provided for herein.

(a) The Trustee shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of JOHN DOE, in-kind, so much (even to the extent of the whole) of the net income and/or principal of this Trust as the Trustee shall deem advisable, in his or her sole and absolute discretion, subject to the limitations set forth below. The Trustee shall add to the principal of such Trust the balance of net income not so paid or applied.

(b) It is Grantor's intent to create a Supplemental Needs Trust that conforms to the provisions of Section 7-1.12 of the New York Estates, Powers and Trusts law, or any successor statute thereto.

Grantor intends that the Trust assets be used to supplement, not supplant, impair or diminish, any benefits or assistance of any federal, state, county, city, or other governmental entity for which JOHN DOE may otherwise be eligible or that JOHN DOE may be receiving. Consistent with that intent, it is Grantor's desire that, before expending any amounts from the net income and/or principal of this Trust, the Trustee consider the availability of all benefits from government or private assistance programs for which JOHN DOE may be eligible and that, where appropriate and to the extent possible, the Trustee endeavor to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of JOHN DOE.

(c) USE OF INCOME OR PRINCIPAL. None of the income or principal of this Trust shall be applied in such a manner as to supplant, impair or diminish benefits or assistance of any federal, state, county, city, or other governmental entity for

2 282 which JOHN DOE may otherwise be eligible or which JOHN DOE may be receiving.

(d) EPTL §7-1.6. Grantor directs that the provisions of Section 7-1.6 of the Estates, Powers and Trust Law of the State of New York, or any successor statute thereto, shall not be available to require any invasion of principal by the Trustees or any court.

(e) JOHN DOE does not have the power to assign, encumber, direct, distribute or authorize distributions from this Trust.

(f) In the event that the Trust Estate shall be challenged or in any way threatened with invasion of its funds by any governmental agency or creditor of JOHN DOE or his estate, the Trustee is authorized and empowered, in the Trustee's sole and absolute discretion, to terminate the Trust or any part thereof, and to distribute the remaining trust corpus and any accumulated or accrued income to the beneficiaries named herein as if JOHN DOE is deceased.

(g) FOOD AND SHELTER. Notwithstanding the above provisions, the Trustee may make distributions to meet JOHN DOE’s need for food, shelter or health care even if such distributions may result in an impairment or diminution of JOHN DOE’s receipt or eligibility for government benefits or assistance but only if the Trustee determines that: JOHN DOE’s needs will be better met if such distribution is made, and (ii) it is in JOHN DOE’s best interests to suffer the consequent effect, if any, on his eligibility for or receipt of government benefits or assistance

(h) NULLIFICATION OF PARAGRAPH (g). Provided, however, that if the mere existence of the Trustee's authority to make distributions pursuant to Paragraph(g) shall result in JOHN DOE’s loss of government benefits or assistance, regardless of whether such authority is actually exercised, this paragraph shall be null and void and the Trustee's authority to make such distributions shall cease and shall be limited as provided above, without exception.

(i) Notwithstanding the above provisions to the contrary, if in order to qualify the funding of this Trust as a Medicaid exempt transfer by the Grantor and to qualify this Trust as an unavailable resource for purposes of Medicaid eligibility of JOHN DOE, then the Trustee shall provide for the spending of the Trust assets for the benefit of JOHN DOE on a basis that is actuarially sound based on JOHN DOE’s life expectancy.

(j) OTHER NEEDS AND COMFORTS. The Trustee has discretion to use income and/or principal to insure that the beneficiary enjoys the therapeutic benefits of education, vocational training, hobbies, vacations, modes of transportation, entertainment and any other need and/or comforts JOHN DOE

3 283 may require to enhance his quality of life. This discretion shall include the use of income for needed medical care not paid for by private health insurance or government entitlements. This provision shall include the purchase of any equipment, treatment, computer, services or goods that would enhance the quality of JOHN DOE’s life.

ARTICLE III ADMINISTRATION OF THE ESTATE OF JOHN DOE

Upon JOHN DOE’s death, the Trustee, in the Trust’s sole and absolute discretion, may pay directly or indirectly: (i) funeral expenses of JOHN DOE’s, (ii) any and all death taxes imposed upon JOHN DOE’s estate, (iii) court filing fees of a probate, administration or estate proceeding and any and all legal and accounting fees related to JOHN DOE’s estate.

ARTICLE IV DISPOSITION OF TRUST ESTATE UPON JOHN DOE’S DEMISE

(1). DISTRIBUTIONS.

(a) In the event JOHN DOE predeceases the Grantors, then the Trust shall terminate and the Trustees shall pay and distribute the Trust Estate to the issue of JOHN DOE, per stirpes and subject to the provisions of Article V herein. In the further event JOHN DOE predeceases the Creators leaving no surviving issue, the Trustees shall pay and distribute the Trust Estate to the issue of the Creators, per stirpes.

(b) In the event Creators predecease JOHN DOE, then upon the death of JOHN DOE, the Trustees shall immediately pay and distribute the Trust Estate to the issue of JOHN DOE per stirpes and subject to the provisions of Article V herein. In the event JOHN DOE leaves no surviving issue, the Trustees shall pay and distribute the Trust Estate to the issue of the Creators, per stirpes.

(2). DISTRIBUTION TO CONTINGENT BENEFICIARIES. In the event that none of Grantor’s beneficiaries names hereunder survive to the time the Trust Estate is to vest, then, at the death of the last of them, the then remaining Trust Estate shall be distributed to Grantor’s heirs at law under the laws of the State of New York.

(3) DISTRIBUTIONS TO BENEFICIARIES UNDER AGE TWENTY FIVE. Notwithstanding any above provision to the contrary, if under this Article any such share shall become payable to a beneficiary who is less than twenty-five (25) years of age, then the Trustees shall distribute the entire balance of the principal so held in one lump sum to said

4 284 beneficiary at age twenty-five (25), and, in the meantime, the Trustees shall pay as much of the net income and/or principal of said share as the Trustees shall deem necessary or proper in the Trustees’ sole discretion to or for the benefit of said beneficiary and his or her legal dependents, if any, including education. In the event said beneficiary does not attain age twenty-five (25), then the balance of said share shall be distributed to said beneficiary's issue, per stirpes.

(4) PERSON WITH A SEVERE AND CHRONIC OR PERSISTENT DISABILITY Any provision hereof to the contrary, if any person (other than the Grantor) with a severe and chronic or persistent disability as defined by Section 7-1.12 of the New York Estates, Powers and Trusts law, as amended, is entitled to a trust share hereunder, then said beneficiary’s interest in the trust share shall be held and managed by the Trustee for the benefit of said beneficiary, as provided for herein. A. The Trustee shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of the beneficiary, so much (even to the extent of the whole) of the net income and/or principal of this Trust as the Trustee shall deem advisable, in their sole and absolute discretion, subject to the limitations set forth below. The Trustee shall add to the principal of such Trust the balance of net income not so paid or applied. B. It is the Grantor’s intent to create a Supplemental Needs Trust which conforms to the provisions of Section 7-1.12 of the New York Estates, Powers and Trusts law, or any successor statute thereto. The Grantor intends that the Trust assets be used to supplement, not supplant, impair or diminish any benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving. Consistent with that intent, it is the Grantor’s desire that, before expending any amounts from the net income and/or principal of this Trust, the Trustee consider the availability of all benefits from government or private assistance programs for which the beneficiary may be eligible and that, where appropriate and to the extent possible, the Trustee endeavors to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of the beneficiary. C. None of the income or principal of this Trust shall be applied in such a manner as to supplant, impair or diminish benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving. D. No judge of any Court shall have the power to order the invasion of principal in contravention of this provision. This provision is intended to negate and eliminate any discretion granted to any Court by Section 7-1.6 of the Estates Powers and Trusts Law (E.P.T.L.). E. The beneficiary does not have the power to assign, encumber, direct, distribute or authorize distributions from this Trust. F. Notwithstanding the above provisions, the Trustee may make distributions to meet the beneficiary’s need for food, clothing, shelter or health care even if such distributions may result in an impairment or diminution of the beneficiary’s receipt or eligibility for government benefits or assistance but only if the Trustee determines that:

5 285 (i) the beneficiary’s needs will be better met if such distribution is made, and (ii) it is in the beneficiary’s best interests to suffer the consequent effect, if any, on the beneficiary’s eligibility for or receipt of government benefits or assistance; provided, however, that if the mere existence of the Trustee’s authority to make distributions pursuant to this paragraph shall result in the beneficiary’s loss of government benefits or assistance, regardless of whether such authority is actually exercised, this paragraph shall be null and void and the Trustee’s authority to make such distributions shall cease and shall be limited as provided above, without exception. G. Upon the demise of said beneficiary, any balance remaining of the trust share shall be distributed to JACK DOE; or, if JACK DOE shall not then be living, then to the surviving issue of the parent of the beneficiary per stirpes and subject to the provisions of ARTICLE IV (4) herein.

ARTICLE V PROVISIONS RELATING TO THE TRUST ESTATE

(1) SPENDTHRIFT PROVISION. No interest of any beneficiary in the income or principal of any trust shall be subject to pledge, assignment, sale or transfer in any manner, nor shall any beneficiary have power in any manner to anticipate, charge or encumber his or her interest, nor shall the interest of any beneficiary be liable while in the possession of the Trustee for the debts, contracts, liabilities, engagements or torts of the beneficiary.

(2) GRANTOR'S POWERS. The Grantor reserves the power to reacquire the Trust principal by substituting other property of an equivalent value.

ARTICLE VI POWERS AND DUTIES OF TRUSTEE

(1) INVESTMENTS. The Trustee of each Trust established hereunder (including any Successor Trustee) shall have the continuing, absolute and discretionary power to deal with any property, real or personal, held in such Trust(s). Such power may be exercised independently and without the prior or subsequent approval of any court or judicial authority, and no person dealing with such Trustee shall be required to inquire into the propriety of any of the actions of such Trustee. The Trustee shall not be limited to the type and character of investments in which the Trustee may invest the funds of this Trust, so long as the Trustee uses reasonable prudence and judgment in the selection of investments. The Trustee shall have the following general powers, in addition to, and not by way of limitation of, the powers provided by Section 11-1.1 of the New York Estates, Powers and Trusts Law:

6 286 1. To retain any property so long as such retention appears advisable, and to exchange any such property for other properties and to retain such items received in exchange. 2. To retain such property for any period, whether or not the same be of the character permissible for investments by fiduciaries under any applicable law, and without regard to any effect the retention may have upon the diversification of the investments. 3. To lease any such property beyond the period fixed by statute for leases made by a Trustee and beyond the duration of the Trust Estate created hereunder. 4. To borrow money for any purpose from any source including the Trustee hereunder, and to secure the repayment of any and all amounts so borrowed by mortgage or pledge of any property. 5. To invest any part or all of the principal of the Trust Estate in any common trust fund, legal or discretionary, which may be established and operated by and under the control of the Trustee. 6. To allocate in the Trustee's sole discretion, in whole or in part, to principal or income, all receipts and disbursements for which no express provision is made hereunder, which allocation shall fully protect the Trustee with respect to any action taken or payment made in reliance thereon. We have added language to prevent assets being available to Medicaid. 7. To retain and pay for the benefit of the estate and any beneficiary hereunder attorneys, accountants, financial planners, social workers, health care professionals and any other professional required in the sole discretion of the Trustee, subject to the limitations of Article II. 8. To sell, transfer or exchange any and all Trust assets, real or personal, including the Grantor's residence.

(2) ADDITIONAL POWERS. The foregoing provisions notwithstanding, it is recognized that the Trustee is neither licensed nor skilled in the field of social services. The Trustee may seek the counsel and assistance of JOHN DOE’s guardian, if any, of JOHN DOE’s physician(s), and of any state and local agencies that have been established to assist the handicapped or mentally disabled, and similar resources. The Trustee may use these resources to aid JOHN DOE’s guardian, if any, as appropriate, in identifying programs that may be of social, financial, developmental or other assistance to JOHN DOE. However, the Trustee shall not in any event be liable to JOHN DOE the remainder beneficiaries of the Trust or any other party for his acts as Trustee hereunder so long as he acts reasonably and in good faith. For example, the Trustee, as well as JOHN DOE’s guardian, if any, shall not be liable for the failure to identify each and every program or resource that might be available to JOHN DOE on account of his disabilities.

(3) ACCOUNTINGS. The Trustee shall render to the then current income beneficiary(s), statements of account of receipts and disbursements at least annually, upon the written request of a beneficiary. In addition, a Trustee shall account to the then current income beneficiary(s) upon resignation of said Trustee within thirty (30) days from the said resignation.

(4) LIMITATIONS ON TRUSTEE-BENEFICIARY. Notwithstanding anything

7 287 herein to the contrary, no individual Trustee who is also a beneficiary hereunder shall have any right, power, duty or discretion hereunder concerning the Trust Estate, if such right, power, duty or discretion conferred upon said Trustee under this Agreement is determined to be a general power of appointment under Section 2041 of the Internal Revenue Code of 1986, as amended, which would cause any assets of the Trust Estate to be included in the estate of said Trustee- Beneficiary at death. Any such right, power, duty or discretion with such effect shall be null and void with respect to said Trustee-beneficiary. In such event, the other Trustee(s) shall have the full authority to act.

ARTICLE VII TRUSTEES

(1) APPOINTMENT OF TRUSTEES. Grantor hereby nominates JANE DOE as Trustee.

(2) APPOINTMENT OF SUCCESSOR TRUSTEES. Upon the death, incapacity, resignation or discharge of JANE DOE, JACK DOE, residing at , shall be the Successor Trustee.

(3) REMOVAL AND RESIGNATION OF TRUSTEES.

(a) A Trustee may resign by giving written notice, a signed and acknowledged instrument, delivered to (i) JOHN DOE; (ii) the Guardian of JOHN DOE, if any; (iii) any Successor Trustee; (iv) the Grantor; and (v) the local Social Service agency. (b) The Grantor reserves the right to remove any Trustee upon three (3) days written notice and replace said Trustee with a Successor Trustee. In the event the Grantor removes but fails to replace the Trustee, then the Successor Trustee as provided for herein shall replace the Trustee.

(4) HOLD HARMLESS. No Trustee shall be liable or responsible for any loss or damage arising by reason of any act or omission to or by the Trustee or in connection with any activities carried out under this Trust, except for the Trustee's own gross negligence, willful neglect or unlawful act.

(5) COMPENSATION. The Trustee shall be entitled to receive compensation for services rendered hereunder as may be allowable under the laws of the State of New York and shall also be reimbursed for all reasonable expenses incurred in the management and protection of the Trust Estate and travel and lodging expenses to and from the Trustee's residence and the residence of the beneficiary hereunder as frequently as the Trustee determines in the Trustee's sole discretion.

(6) BOND. No bond or other security shall be required of any Trustee or Successor Trustee named hereunder.

8 288 ARTICLE VIII MISCELLANEOUS

(1) PARAGRAPH HEADINGS. The paragraph headings used are for convenience only and shall not be resorted to for interpretation of this Trust. Wherever the context so requires, the masculine shall include the feminine and neuter and the singular shall include the plural.

(2) VALIDITY OF PROVISIONS. If any portion of this Trust is held to be void or unenforceable, the balance of this Trust shall nevertheless be carried into effect.

IN WITNESS WHEREOF, JANE DOE, Grantor, and JANE DOE, Trustee, have signed and sealed this Trust Agreement.

______JANE DOE, Grantor

______JANE DOE, Trustee

STATE OF NEW YORK ) ) ss.: COUNTY OF )

On the ______day of______, in the year 2017, before me, the undersigned, a Notary Public in and for said state, personally appeared ______personally known to me or proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that (s)he executed the same in his/her capacity, and that by his/her signature on the instrument, the person or the entity upon behalf of which the person acted, executed the instrument.

Notary Public

9 289 Exhibit A to the JOHN DOE Trust DATED January , 2017:

Receipt of the above listed items is hereby acknowledged by:

______JANE DOE, Trustee

DATED:

______WITNESS

10 290 Anatomy of a Trust: Supplemental Needs Trusts

ELIZABETH FORSPAN, ESQ. April 2017

www.fatoullahlaw.com

1‐877‐ELDER‐LAW or 1‐877‐ ESTATES 212‐751‐7600 ‐ 516‐466‐4422 ‐ 718‐261‐1700

291 Basics and Required Terms

• A is established for a person with special needs to supplement rather than supplant any benefits the person with special needs may receive from government programs and is designed to hold and manage assets for that person's benefit while not compromising his or her access to important government benefits. • A properly drafted special needs trust will allow the beneficiary to receive government benefits while still having funds in the trust. • There are two main types of special needs trusts: – First‐party trust – Third‐party trust • Both name the individual with special needs as the beneficiary

Ronald Fatoullah & Associates 2

292 First and Third Party Special Needs Trusts

Source Who Trustee Distribu of Funds Establis tion hes Upon Death First Disabled Parent, Grantor’ Medicai Party Individu Grandpa s wishes d Trust al’s rent, payback, funds Guardia then prior to n, remaind age 65 Court, er The benefici Individu aries *Special Needs Trustal* Fairness Act (December 2016) Previously, such trusts could only be established by a parent, Thirdgrandparent,Anyone legal guardian Anyone or a court. Grantor’ Under the newGrantor’ federal law, individuals with disabilities can create a special needs trust Partyfor themselves except rather thanexcept relying ons others wishes to dos so. wishes State’s Trust beneficimustbenefici adopt the law. ary ary Ronald Fatoullah & Associates 3

293 Third Party SNT: History

• Matter of Escher. 94 Misc. 2d 952, 407 N.Y.S.2d 106 (Surr. 1978) aff’d mem. 75 A.D.2d 531 (1st Dept. 1980), aff’d 52 N.Y. 1006, 438 N.Y.S.2d 293) (1981) • Third party trust funds were declared to be good public policy in order to provide services for disabled individuals to supplement rather than supplant their government benefits • EPTL 7‐1.12: NYS Legislature enacted a statute to encourage third parties to establish Supplemental Needs Trusts for loved ones with disabilities.

Ronald Fatoullah & Associates 4

294 Third‐Party SNT

• Definitions: • For SSI purposes, SSA defines a third party trust as "a trust established by someone other than the beneficiary as grantor.“ • It defines a grantor as "the individual who provides the trust principal (or corpus).”

Ronald Fatoullah & Associates 5

295 Third‐Party Special Needs Trust

• Requirements: – Beneficiary did not create the trust – Trust does not hold Beneficiary’s assets – Beneficiary is not Trustee – Trustee has sufficient discretion to withhold distributions

Ronald Fatoullah & Associates 6

296 Third‐Party SNT

Requirements: • No Medicaid “pay‐back” requirements – Grantor can leave any remaining funds to whomever he or she wants • Revocable during life of Grantor • If the Grantor’s spouse is the beneficiary of the SNT, it must be established by the terms of the Settlor’s will (not a Revocable Trust) • More drafting flexibility as long as correct distribution standard is used

Ronald Fatoullah & Associates 7

297 Third Party SNT: Lifetime vs. Testamentary

• Testamentary Trust: – Any person may establish a testamentary trust for the benefit of a disabled person • Spousal Testamentary Trusts: – The trust may allow the discretionary invasion of principal – The trust may direct that all income be provided to the surviving spouse • Lifetime/Inter‐vivos Trust – The creator can be a person or entity other than the beneficiary’s spouse or a person with a legal obligation to support the beneficiary – In general, parents are not included in this prohibition of a legally responsible relative funding an inter‐vivos trust for a minor child – EPTL 7‐1.12(a)(5)(iv)

Ronald Fatoullah & Associates 8

298 First Party SNT: History

• In 1993 Congress enacted The Omnibus Budget Reconciliation Act of 1993 (OBRA‐1993). • This law permitted a parent, grandparent, guardian or court to establish a self‐settled SNT for an individual with disabilities under the age of 65 with the individual’s own assets. • Self‐settled SNTs have become an important planning tool for many individuals with disabilities who are in receipt of certain government benefits and then receive funds as a result of an inheritance, or otherwise. • OBRA‐93 provided that assets contained in a properly drafted self‐settled SNT don not disqualify the individual with disabilities from continuing to receive government benefits such as Supplemental Security Income (SSI) and Medicaid. • The assets contained in the SNT may be used to improve the quality of life of the individual with disabilities without sacrificing the government benefits.

Ronald Fatoullah & Associates 9

299 First Party SNT: Recent Changes

• Special Needs Trust Fairness Act (December 13, 2016) • Previously, such trusts could only be established by a parent, grandparent, legal guardian or a court. • OBRA‐93 failed to provide a mechanism for individuals with disabilities who had capacity to independently establish a self‐settled SNT. • The 21st Century Cures Act inserts the term “the individual,” after “for the benefit of such individual by.” • Under the new law, individuals with disabilities can create a special needs trust for themselves rather than relying on others to do so.

Ronald Fatoullah & Associates 10

300 First Party SNTs

• Common Situations where a First Party SNT is necessary: – Personal Injury Award – Inheritance or Gift – Minor with a Disability Turns 18 – Recently Disabled Adult

Ronald Fatoullah & Associates 11

301 First Party SNT (d)(4)(A) SNT Requirements

• Authorized by 42 U.S.C. §1396p(d)(4)(A) and has the following characteristics: – Irrevocable – Established by parent, grandparent, legal guardian, court, or the individual(Special Needs Trust Fairness Act, December 2016) – For the sole benefit of a person with a disability who is under the age of 65 – Provide that on the death of the beneficiary, the trustee must repay Medicaid for all benefits received by the beneficiary during his or her lifetime to the extent that funds remain in the trust at the beneficiary's death • Upon the beneficiary's death every state in which the beneficiary received benefits must be paid back its proportional share of the assets remaining in the trust.

Ronald Fatoullah & Associates 12

302 First Party SNT: Termination “Payback Provision”

 Upon the termination of an SNT, the Trustee may pay  Reasonable fees for administration of trust  Taxes  Then the Trustee must pay all State Medicaid agencies  Not allowed prior to payback  Funeral Expenses (prepay for funeral)  Preexisting debts

Ronald Fatoullah & Associates 13

303 “Sole Benefit Rule”

• When a third party’s assets fund a trust for a person with a disability so that the third party will receive Medicaid benefits immediately, that trust must be used for the sole benefit of the person with a disability (“the beneficiary”), as two individuals, in essence, will be receiving benefits without any Medicaid transfer penalty • A trust is considered to have been established for the sole benefit of an individual if the trust benefits no one but that individual, whether at the time the trust is established or at any time for the remainder of the individual's life. • The sole benefit trust must be used solely for the benefit of the disabled beneficiary during his or her lifetime. • State law requires that a sole benefit trust, established with the assets of one person for the sole benefit or a person with a disability under the age of 65 in which both individuals receive Medicaid, provide payback to the State upon the death of the Beneficiary or be used on an actuarially sound basis for the beneficiary during his/her lifetime

Ronald Fatoullah & Associates 14

304 Coordination with Medicaid and SSI

• Medicaid: Excess Income Calculation – A Medicaid recipient residing in a nursing facility will pay all income but $50/month to the facility to offset the cost of care – A Medicaid recipient residing in the community may retain income of $825/month + $20 disregard – Generally, cash income above the Medicaid allowable rates for a Community Medicaid recipient must be “spent down” on medical needs or via a Pooled Trust – However, a Pooled Income Trust may be funded monthly with the excess income and used to pay the nonmedical bills of the Medicaid recipient who receives Community Medicaid

Ronald Fatoullah & Associates 15

305 Coordination with Medicaid and SSI

SSI Income: • An individual eligible for SSI automatically qualifies for Medicaid in NY State • The resource level for SSI is $2,000 for a single individual • For 2017, the highest federal benefit level for SSI for an individual residing in his own home is $735/month • When computing the monthly SSI payment, the SSA considers other income earned by the SSI recipient • Unearned income, such as income provided by a trust, given in cash to the SSI recipient, will be deducted from the SSI stipend • Income from the trust paid directly to the SSI recipient is countable unearned income that reduces the SSI benefit dollar for dollar • However, bills paid directly to the supplier of services other then food and shelter will not result in a reduction of SSI benefits • When a third party pays for an SSI recipient’s food and shelter, that results in a reduction in the SSI payment of either the dollar amount paid for the food and shelter, or 1/3 of the SSI amount, whichever is less

Ronald Fatoullah & Associates 16

306 Coordination with Medicaid and SSI

• Home owned by SNT – A home owned by an SNT is not a countable resource for SSI or Medicaid, even if the beneficiary does not reside in the home, as it is a trust asset – The use of trust assets to purchase a home will not reduce Medicaid benefits – However, the purchase of the home by the trust will be considered in‐kind support that will cause a 1/3 reduction of SSI in the month of purchase – If the SNT pays for shelter costs for the beneficiary, that will reduce the monthly SSI benefit by up to 1/3 – If the SNT owns the home but does not pay for housing costs, there is no reduction in SSI monthly benefits

Ronald Fatoullah & Associates 17

307 Anatomy of a Trust: Supplemental Needs Trusts

ELIZABETH FORSPAN, ESQ. April 2017

www.fatoullahlaw.com

1‐877‐ELDER‐LAW or 1‐877‐ ESTATES 212‐751‐7600 ‐ 516‐466‐4422 ‐ 718‐261‐1700

308

Ethical Considerations in Representing Fiduciaries

by

Ian W. MacLean, Esq.*

The MacLean Law Firm, P.C. New York City and Eric W. Penzer, Esq.

Farrell Fritz, P.C. Uniondale, L.I.

* I wish to acknowledge with much gratitude Corinne Avanzino, J.D., for her assistance and contribution in the preparation of this outline.

309

310 Anatomy of a Trust Ethical Considerations in Representing Fiduciaries By Ian W. MacLean* and Eric W. Penzer

I. Introduction A. What this Outline and Presentation is About 1. Ethical Conduct for Attorneys in New York Representing Fiduciaries 2. Rules that Apply to Conflicts and Duties, Confidentiality and Privilege, Engagement Letters and Attorney’s Fees II. The Rules A. New York – The New York Rules of Professional Conduct 1. Effective April 1, 2009 2. Superseded the Lawyer’s Code of Professional Responsibility a. LCPR = Cannons, Ethical Considerations and Disciplinary Rules 3. Adopted by the Appellate Division of the Supreme Court and Published at Part 1200 of the Joint Rules of the Appellate Division – 22 N.Y.C.R.R. Part 1200. 4. Preamble, Scope and Comments a. Appellate Division has NOT adopted the Preamble to the Rules, the Scope section or the Comments b. These provisions are “published solely by the New York State Bar Association to provide guidance for attorneys in complying with the Rules.” 5. Applicable Rules: a. Conflict of Interest (i) 22 N.Y.C.R.R. §1200 Rule 1.7(a) - Overview: A lawyer shall not represent a client if, a reasonable lawyer would conclude, that representation will involve representing differing interests or

* I wish to acknowledge with much gratitude Corinne Avanzino, J.D., for her assistance and contribution in the preparation of this outline.

NYSBA Anatomy of a Trust: Ethics Outline 1 March 2017

311 there is a significant risk the lawyer’s professional judgment may be compromised by the lawyer’s own interests. (ii) 22 N.Y.C.R.R. §1200 Rule 1.7(b) - Overview: Notwithstanding a current conflict of interest, a lawyer may represent two clients if the lawyer reasonably believes the representation will be competent and diligent to each affected client, the representation is not illegal, the clients are not adverse parties in the same matter, and each affected client gives written informed consent. b. Informed Consent - 22 N.Y.C.R.R. § 1200 Rule 1.0(j) (i) Overview: An agreement by a person to a proposed course of conduct, after the lawyer has communicated adequate information to make an informed decision, and after adequate explanation by the lawyer of material risks of the proposed course of conduct and reasonably available alternatives. c. Differing Interests - 22 N.Y.C.R.R. § 1200 Rule 1.0(f) (i) Overview: Differing interests include every interest that will adversely affect either the judgment or the loyalty of a lawyer to a client, whether it be a conflict, inconsistent, diverse, or other interest. d. Capacity & Diminished Capacity (i) 22 N.Y.C.R.R. §1200 Rule 1.14(a) - Overview: When representing a client whose capacity to make adequately considered decisions about his representation is diminished, the lawyer shall, as far as reasonably possible, maintain a conventional relationship with the client. (ii) 22 N.Y.C.R.R. §1200 Rule 1.14(b) - Overview: A lawyer may take reasonably necessary protective action when the lawyer believes the client has diminished capacity. This includes consulting with individuals or entities that have the ability to take action to protect the client, and seeking appointment of a guardian ad litem, conservator or guardian. (iii) 22 N.Y.C.R.R. §1200 Rule 1.14(c) - Overview: When taking protective action for a client with diminished capacity, a lawyer is impliedly authorized, under Rule 1.6(a), to reveal information about the client, to the extent reasonably necessary to protect the client’s interests.

NYSBA Anatomy of a Trust: Ethics Outline 2 March 2017

312 e. Confidentiality of Information (i) 22 N.Y.C.R.R. § 1200 Rule 1.6(a) - Overview: A lawyer shall not knowingly reveal confidential information, as defined in this Rule, or use such information to the disadvantage of a client or for the advantage of the lawyer or a third person, unless (1) the client gives informed consent; (2) the disclosure is impliedly authorized to advance the best interests of the client and is either reasonable under the circumstances or customary in the professional community; or (3) the disclosure is permitted by paragraph (b). (ii) “Confidential Information” defined: “consists of information gained during or relating to the representation of a client, whatever its source, that is (a) protected by the attorney-client privilege, (b) likely to be embarrassing or detrimental to the client if disclosed, or (c) information that the client has requested to keep confidential.” Rule 1.6(a)(3). (iii) 22 N.Y.C.R.R. § 1200 Rule 1.6(b) - Overview: A lawyer may reveal or use confidential information to the extent that the lawyer reasonably believes is necessary: (1) to prevent reasonably certain death or substantial ; (2) to prevent the client from committing a ; (3) to withdraw a written or oral opinion or representation previously given by the lawyer and reasonably believed by the lawyer still to be relied upon by a third person, where the lawyer has discovered that the opinion or representation was based on materially inaccurate information or is being used to further a crime; (4) to secure legal advice about compliance with these Rules or other law by the lawyer, another lawyer associated with the lawyer’s firm or the law firm; (5) (i) to defend the lawyer or the lawyer’s employees and associates against an accusation of wrongful conduct; or (ii) to establish or collect a fee; or (6) when permitted or required under these Rules or to comply with other law or court order. B. Sources – Committees, Sections and Reporters on Ethics 1. NYSBA a. NYSBA Committee on Professional Ethics Opinions (i) One Elk Street, Albany, New York 12207, or faxed to (518) 487- 5694, or emailed to [email protected]

NYSBA Anatomy of a Trust: Ethics Outline 3 March 2017

313 (ii) http://www.nysba.org/Ethics/. b. Ethics Hotline c. Ethics Opinions of Other Specific Law Topic Committees 2. NYCBA – NYCBA.ORG a. NYCBA Committee on Professional Ethics Opinions b. http://www.nycbar.org/ethics/informal-ethics-opinions/. 3. Nassau County Bar Association a. Nassau County B. Assoc. Ethic Committee Opinions b. https://www.nassaubar.org 4. New York County Association a. NYC Lawyers Association Professional Ethics Committee (i) The oldest bar association ethics committee in the country, according to its website (ii) http://www.nycla.org/index.cfm?page=Ethics. b. Ethics Hotline (i) http://www.nycla.org/index.cfm?section=Ethics&page=Ethics_H otline. 5. Other County Bar Associations 6. ABA Ethics Opinions a. ABA Standing Committee on Ethics & Professional Responsibility b. http://www.americanbar.org/groups/professional_responsibility/comm ittees_commissions/ethicsandprofessionalresponsibility.html. 7. New York Legal Ethics Reporter (www.newyorklegalethics.com) 8. New York Law Journal 9. Lexis and Westlaw C. New York – Statutes 1. 22 N.Y.C.R.R. § 1200 – Rules of Professional Conduct 2. 22 N.Y.C.R.R. § 1215 – Letters of Engagement Rules D. New York – Case Law E. New York – Disciplinary Hearings

NYSBA Anatomy of a Trust: Ethics Outline 4 March 2017

314 F. ABA Model Rules G. Federal Rules of Evidence III. Conflicts and Duties A. Who is your client? 1. 22 N.Y.C.R.R. §1200 Rule 1.13(a), Organization as Client a. The lawyer, employed or retained by an organization, shall explain to constituents of the organization that the lawyer represents the organization, not the constituents. 2. 22 N.Y.C.R.R. §1200 Rule 1.13(c), Confidentiality with Organization as Client a. If the highest authority that can act on behalf of the organization insists upon action, or refusal or action, that is in violation of law and will result in substantial injury to the organization, the lawyer may reveal confidential information only if permitted by Rule 1.6. 3. 22 N.Y.C.R.R. §1200 Rule 4.1, Truthfulness in Statements to Others a. In the course of representing a client, a lawyer shall not knowingly make a false statement of fact or law to a third person. 4. 22 N.Y.C.R.R. §1200 Rule 4.4(a), Respect for Rights of Third Persons a. In representing a client, a lawyer shall not use means that have no substantial purpose other than to…harm a third person or…violate the legal rights of such a person. b. Responsibility to a client requires a lawyer to subordinate the interests of others to those of the client, but that responsibility does not imply that a lawyer may disregard the rights of third persons. Rule 4.4 cmt. [1]. B. Conflicts of Interest – Multiple Clients 1. Current Clients – Rule 1.7 a. Representation of multiple clients is an issue that is more frequently encountered in estate proceedings than other types of actions and proceedings because of the fact that there are usually more parties involved b. Fiduciaries (i) Executors/Administrators

NYSBA Anatomy of a Trust: Ethics Outline 5 March 2017

315 (ii) Trustees (iii) Guardians of the Person or the Property – 17A or 81 (iv) Attorneys-in-fact (Agents) c. Beneficiaries d. Creditors 2. Three-Part Inquiry a. First inquiry is whether a conflict exists; a conflict exists if either (i) the attorney’s exercise of independent professional judgment on behalf of one client will be or is likely to be adversely affected by representing the other client, or (ii) the simultaneous representation of both clients would be likely to involve the lawyer in representing differing interests Those “differing interests” can be both legal or factual interests b. If a conflict exists, next inquiry is whether it is a conflict that can be waived (i) A conflict can be waived if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; and (2) the representation is not prohibited by law (comments to the Rules note that, for example, federal criminal statutes prohibit certain representations by a former government lawyer despite the informed consent of the former governmental client; in addition, there are some instances where conflicts are nonconsentable under decisional law); and (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a (ii) If conflict can be waived, it can only be waived by each affected client, giving informed consent, confirmed in writing (1) Informed consent requires that each affected client be aware of the relevant circumstances, including the material and reasonably foreseeable ways that the conflict could adversely affect the interests of that client

NYSBA Anatomy of a Trust: Ethics Outline 6 March 2017

316 (2) Informed consent also requires that the client be given the opportunity to obtain other counsel if the client so desires (3) Such a writing may consist of: A document from the client, A document that the lawyer promptly transmitted to the client confirming an oral informed consent, or A statement by the client made on the record of any proceeding before a tribunal, whether before, during or after a or hearing. CAVEAT – a client who has given consent to a conflict may revoke the consent and, like any other client, may terminate the lawyer’s representation at any time. Whether revoking consent to the client’s own representation precludes the lawyer from continuing to represent other clients depends on the circumstances (iii) What if a conflict arises after representation has been undertaken? (1) The lawyer ordinarily must withdraw from the representation unless the lawyer is able to, and has, obtained the informed consent of the client (2) Where more than one client is involved, whether the lawyer may continue to represent any of the clients is determined both by the lawyer’s ability to comply with duties owed to the former client and by the lawyer’s ability to represent adequately the remaining client or clients, given the lawyer’s duties to the former client 3. Some Possible Situations a. Joint Representation of Fiduciaries and Beneficiaries (i) It would seem clear that a conflict exists because the lawyer is being asked to represent “differing interests” (ii) So, the next inquiry is whether the conflict is waivable, i.e., does the lawyer reasonably believe that the lawyer will be able to provide competent and diligent representation to each affected client

NYSBA Anatomy of a Trust: Ethics Outline 7 March 2017

317 (1) One could think of an amicable estate administration where there is little in dispute and there is little potential for conflict between the executor/administrator and the beneficiary (2) However, what starts as a friendly estate administration can turn ugly; clients can revoke consent and then the question might be appropriately posed, was it appropriate for the attorney to represent both clients to begin with (3) Imagine the situation, for example, where a fiduciary, in marshaling estate assets, learns of questionable lifetime transfers in favor of a beneficiary, or other potential claims that could be asserted on behalf of the estate against a beneficiary, or a claim by the beneficiary against the estate b. Joint Representation of Multiple Fiduciaries (i) Absent a conflict, there is no reason an attorney cannot represent multiple fiduciaries (1) After all, they owe a common fiduciary duty to the Estate (2) And, regardless of who among the fiduciaries is the more sophisticated or who is the “laboring oar”, co-fiduciaries will generally be held jointly and severally liable to the beneficiaries of the estate for any malfeasance (3) There is a financial incentive for representation of multiple fiduciaries (a) Although each fiduciary is permitted to hire and pay his or her own attorney, the court will generally award the payment of only one reasonable legal fee from the estate (4) However, notwithstanding that the fiduciaries are similarly situated as a matter of law, there may be “differing interests” among the fiduciaries that could prohibit multiple representation (5) Imagine the situation where a fiduciary is also an officer or director of a corporation in which the estate has an interest, or that is an asset of the estate? (a) Surely there could be disagreements among the fiduciaries as to the operation of the corporation, or the distributions to be made therefrom

NYSBA Anatomy of a Trust: Ethics Outline 8 March 2017

318 (b) Fiduciaries can also disagree as to investment decisions that might come up during a lengthy estate administration (c) Where one or more of the fiduciaries are also beneficiaries, may be disputes as to how to satisfy bequests (d) And, notwithstanding the fact that co-fiduciaries are generally jointly and severally liable to beneficiaries for malfeasance, there may be fights among the fiduciaries as to who was “more at fault” in connection with claims among them for contribution (e) For example, where “one of two trustees is substantially more at fault than the other . . . the other is entitled to full from him” (see 3A Frachter, Scott on Trusts § 258.1, at 401). (f) This may be true, for example, where one co-trustee is an attorney and the others are laypersons (Matter of Rosenfeld’s Estate, 180 Misc. 452 [Sur Ct NY County 1943]). (g) In Scalp & Blade, Inc. v Advest, Inc., 300 AD2d 1068 (4th Dep’t 2002), one trustee was found liable to the beneficiaries and was surcharged for investment losses. He sought contribution from his co-trustees. The court concluded that he could not recover in contribution from his co-trustees because he “was substantially more at fault for the investment losses sustained by plaintiffs, and further, he benefited from the investment activity. (6) Bottom line - it may well be necessary for co-fiduciaries to take adversarial positions against each other (7) Proceed with great caution when asked to undertake representation of multiple fiduciaries c. Multiple Beneficiaries (i) Can you represent multiple estate beneficiaries? (1) It depends - are their interests the same? (What are “differing interests”?)

NYSBA Anatomy of a Trust: Ethics Outline 9 March 2017

319 (a) In Will proceedings, even where the Will provides for an equal split between beneficiaries, there can be conflicts (b) One beneficiary might like you to take a position in an accounting proceeding that places him or her at odds with another beneficiary (c) For example, is there a disagreement among them as to the value of estate assets to be distributed “in kind” (d) Were there lifetime transfers to one beneficiary that might place him or her at odds with the other beneficiaries, or claims that one beneficiary is in possession of estate assets? (e) Does the beneficiary have potential claims that could be asserted against the estate – if you also represent the fiduciary, how can you advice your beneficiary client as to the viability of such a claim? (ii) The “take away” here is that as a lawyer you must be very careful in deciding whether to represent multiple parties in an estate matter - when in doubt, do not undertake multiple representation. You are jeopardizing violating an ethical rule, and you’re also placing your fee in jeopardy. 4. Former Clients - 22 N.Y.C.R.R. §1200 Rule 1.9 a. A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing. (i) Comment 3: “Matters are ‘substantially related’ for purposes of this Rule if they involve the same transaction or legal dispute or, if, under the circumstances, a reasonable lawyer would conclude that there is otherwise a substantial risk that confidential factual information that would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.” (ii) Two issues: (1) The same or a substantially related matter

NYSBA Anatomy of a Trust: Ethics Outline 10 March 2017

320 (2) Materially adverse interests b. Unless the former client gives informed consent, confirmed in writing, a lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client: (i) whose interests are materially adverse to that person; and (ii) about whom the lawyer had acquired information protected by Rules 1.6 or paragraph (c) of this Rule that is material to the matter. (iii) Three issues: (1) The same or a substantially related matter (2) Materially adverse interests (3) About whom the lawyer had acquired confidential information c. Waiver – informed consent confirmed in writing 5. Prospective Clients – 22 N.Y.C.R.R. §1200 Rule 1.18 a. The New York Code of Professional Responsibility (the predecessor to the New York Rules of Professional Conduct) had no rule addressing the duties that lawyers owed to prospective clients b. The Rule balances the need for protection of those who consult lawyers about a possible representation with the need for freedom of the parties to decide not to pursue the representation c. It subjects lawyers to duties regarding confidential information and adverse representations that are significant, but that are more limited in scope than those owed to current clients or former clients d. Rule 1.18 imposes two main duties on a lawyer who has had discussions with a prospective client about a matter: (i) First, the lawyer is restricted from using or revealing information learned in the consultation to the same extent that a lawyer would be restricted with regard to information of a former client (ii) Second, the lawyer may not represent a client with materially adverse interests in the same or a substantially related matter if the information received from the prospective client could be significantly harmful to the prospective client in that matter

NYSBA Anatomy of a Trust: Ethics Outline 11 March 2017

321 (1) Both duties are determined by the nature of the information obtained from the prospective client (2) The Rule defines who is a prospective client and provides several important exceptions to the duties owed, including exceptions for informed consent and the use of ethical screens (iii) Three issues: (1) Materially adverse interests (2) The same or a substantially related matter (3) Information received from the prospective client could be significantly harmful to the prospective client e. Not all persons who communicate information to a lawyer are entitled to protection under Rule 1.18 (i) The Rule defines “prospective client” as a person who discusses with a lawyer “the possibility of forming a lawyer-client relationship with respect to a matter.” (1) So not just casual conversation on the golf course or at a cocktail party (ii) Paragraph (e) of the Rule excludes from the definition of a “prospective client” a person who communicates unilaterally to a lawyer without any reasonable expectation that the lawyer is willing to discuss the possibility of a representation, or communicates with a lawyer for the purpose of disqualifying the lawyer from handling certain material adverse representations (1) The “Tony Soprano” exception f. Paragraph (d) of the Rule provides two important exceptions to the restriction on representation in paragraph (c) (i) The first exception applies both to the individual lawyer and the lawyer’s firm – both the lawyer and the firm may take on an otherwise prohibited representation if both the prospective client and the affected client have given informed consent, confirmed in writing (ii) The second exception applies only to the disqualified lawyer’s firm (but not the disqualified lawyer). The firm may take on the representation if the disqualified lawyer took reasonable steps to avoid exposure to more disqualifying information than was

NYSBA Anatomy of a Trust: Ethics Outline 12 March 2017

322 necessary to determine whether to represent the prospective client; and (1) the firm acts promptly and reasonably to notify its personnel that the disqualified lawyer is prohibited from participating in the representation of the current client; (2) the firm implements effective screening procedures with respect to the disqualified lawyer; (3) the disqualified lawyer is apportioned no part of the fee; and (4) written notice is promptly given to the prospective client. (iii) However, neither exception is available unless a reasonable lawyer would conclude that the firm would be able to provide competent and diligent representation in the matter IV. Confidentiality and Privilege A. Confidentiality – 22 N.Y.C.R.R. § 1200 Rule 1.6 B. Privilege 1. The Attorney Client Privilege is the oldest evidentiary privilege at common law and is essential to our legal system. Upjohn Co. v. U.S., 448 U.S. 383, 389 (1981) (stating that it is necessary to “promote border public interests in the observance of law and administration of .”). 2. Nevertheless, because it necessarily impedes the administration of justice, it is strictly construed. Fisher v. U.S., 425 U.S. 391, 403 (1976) (“Since the privilege has the effect of withholding relevant information from the factfinder, it applies only where necessary to achieve its purpose.”) C. CPLR § 4503(a)(1)&(2) – Confidential Communication Privileged 1. “Unless the client waives the privilege,” an attorney or any person who works for or with that attorney, or any person who gets knowledge without the client’s knowledge of a confidential communication, shall not disclose a confidential communication made between the attorney and the client in the course of professional representation, except for very specific exceptions 2. Just fourteen years ago the statue was amended to provide that if the client is a personal representative, then, in the absence of an agreement to the contrary, the beneficiaries of the estate or trust are not the client and the existence of the fiduciary relationship between the personal representative and the beneficiary does not constitute a waiver of the

NYSBA Anatomy of a Trust: Ethics Outline 13 March 2017

323 confidential communication privilege between the attorney and the personal representative 3. The exceptions include communications made in the presence of third parties (except third parties for whom there is a reasonable expectation that the communication will remain confidential), communications not pertinent to legal representation, communication about the underlying facts, the existence of a and communication about which the privilege has been waived 4. Fiduciary Exception to the Attorney Client Privilege a. Common Law Concept – Requires disclosure to beneficiaries of otherwise confidential communication between the attorney and the personal representative client where the personal representative sought the legal advice in exercising the fiduciary’s duties and responsibilities on the basis or theory that the fiduciary’s duty to administer the estate or trust solely for the benefit of the beneficiaries takes priority over the attorney-client privilege b. CPLR § 4503(b) – in any action involving the probate, validity or construction of a will or, after the grantor’s death, a revocable trust, an attorney or his employee shall be required to disclose to information as to the preparation, execution or revocation of any will, revocable trust, or other relevant instrument, but he shall not be allowed to disclose any communication privileged under subdivision (a) which would tend to disgrace the memory of the decedent (i) On August 19, 2016, Governor Cuomo signed into law an amendment to CPLR §4503(b), which extends the exception to the attorney-client privilege in the case of revocable trusts D. Whose Privilege 1. It’s the client’s privilege, not the attorney’s 2. The confidential communication privilege survives our clients 3. If you represented the decedent before he or she died, or you’re representing the personal representative, the personal representative cannot waive the decedent’s privilege rights, unless it is to effectuate the intentions of the decedent V. Engagement Letters and Conflict of Interest Strategies A. Court Rules

NYSBA Anatomy of a Trust: Ethics Outline 14 March 2017

324 1. 22 N.Y.C.R.R. §1215.1 Written Letter of Engagement Requirements a. The letter of engagement should explain the scope of the legal services to be provided, explain attorney’s fees to be charged, as well as expenses and billing practices, and provide that the client may have the right to arbitrate fee disputes. b. Exceptions: Engagement letters are not required if: (i) The fee to be charged is expected to be less than $3,000; (ii) The attorney’s services are the same as those previously rendered to and paid for by the client; (iii) The client is in a domestic relations matter subject to Part 1400; or (iv) The attorney is not admitted in New York and no material portions of the services are to be rendered in New York. B. Articles 1. Marian C. Rice, Start Out Right: Engagement Letters, NYSBA Journal, June 2015, p. 34. 2. Practice and Ethics Committee, Arbitration and Engagement Letters, NYSBA Trust and Estates Law Section Newsletter, Fall 2002, Vol. 35, No. 3. 3. Anthony E. Davis, Professional Responsibility; The Importance of Engagement Letters; News, N.Y.L.J., May 2, 2005 at 10, col. 4. 4. David G. Keyko, Practicing Ethics; Engagement Letters, N.Y.L.J., Nov. 25, 2005 at 17, col. 3. C. Court Trend: Enforcing Provisions in Retainer Agreements Where Parties Consent to Joint Representation and Waive Conflicts of Interest

1. Consider GEM Holdco LLC v. Changing World Technologies, L.P., 130 A.D.3d 50614 (1st Dep’t 2015) (motion court properly denied motion to disqualify firm from representing defendant where, in retainer agreement,

NYSBA Anatomy of a Trust: Ethics Outline 15 March 2017

325 the moving defendants specifically waived any conflict of interest that might arise from the firm's representation of both them and the other defendants). a. There, a law firm appeared for three originally named defendants. Thereafter, the plaintiff amended the complaint to include an additional defendant. Pursuant to an agreement among the parties, one of the original defendants had to pay the costs of the additionally named defendant, and thus sought to have the same law firm represent it. b. Law firm’s retainer letter provided that, although the law firm did not perceive any actual conflict of interest among the defendants, it was possible that one could arise, in which case the firm would cease to represent the additionally named defendant and continue representing the original three defendants. In the letter, the additional defendant consented to the firm’s continued and future representation of the original defendants agreed not to assert any such conflict of interest or seek to disqualify the firm from representing them, notwithstanding any adversity or litigation that may exist or develop. c. After a conflict arose between the original defendants and the new defendant, new counsel appeared for the additional defendant and sought the disqualification of the original firm – court denied motion on the basis of the waiver, and 1st Department affirmed. d. Notably, given the waiver, the court found it irrelevant whether the firm obtained confidential information from the additional defendant, and whether there was an actual, undisclosed conflict of interest at the inception of the joint representation. VI. Attorney’s Fees/Applications for Attorney Fees A. Introduction 1. Attorney’s fees are a “big deal” in the Surrogate’s Courts -- much more so than in other courts

a. In other courts, when called upon to address attorney’s fees, the court may be limited to deciding whether the fee agreement reached between attorney and client is enforceable -- whether it is unconscionable, and whether the attorney earned his or her fee

NYSBA Anatomy of a Trust: Ethics Outline 16 March 2017

326 b. But in Surrogate’s Court, it is up to the Surrogate to decide the professional fees payable from an estate, and the Surrogate is not bound by the fee agreement reached between the attorney and client 2. Let’s start with the proposition that generally speaking, a fiduciary is entitled to retain counsel a. Make clear -- who is the client? (i) Attorney cannot represent “an estate” -- only a fiduciary (ii) Court: “Who do you represent?” Correct answer -- “X, as fiduciary of the Estate” b. Where there are multiple fiduciaries, each fiduciary may retain separate counsel. (i) Matter of Schwartz, 240 AD2d 268 (1st Dept. 1997), where the court made clear that where there are two or more fiduciaries, each possesses an “equal right” to pay attorney’s fees (ii) Notwithstanding the Court’s power to ultimately fix attorney’s fees, a fiduciary can generally advance fees to his or her counsel without a court order (iii) EPTL § 11-1.1(b) (22) authorizes every fiduciary, in the absence of contrary language in the underlying instrument, to pay “any reasonable counsel fees he may necessarily incur” c. What if the co-fiduciaries are not in agreement regarding the advance payment of counsel fees? (i) Questions turns on how the fiduciaries are empowered to act. (ii) Does the Will require them to act by majority only? (iii) Unless the Court order of appointment or the governing instrument provide otherwise, the payment of attorney’s fees is a “several” power that co-fiduciaries can exercise unilaterally (EPTL 11-1.1[b][22]). It shouldn’t matter which fiduciary is in possession of the estate checkbook - the First Department made clear in Matter Schwarz (240 AD2d 268 [1st Dep’t 1997]), that “every estate fiduciary, by virtue of his office, is entitled to the custody of the assets of the estate or fund. When there are two or more fiduciaries, each possesses an equal right in this regard ...” d. So generally, a fiduciary may advance legal fees to his or her counsel.

NYSBA Anatomy of a Trust: Ethics Outline 17 March 2017

327 (i) However -- big however -- at the end of the day (on a fee application or in an accounting proceeding) it is up to the court to fix the fee to be paid from the estate.

Can be less than the amount agreed to by the attorney and fiduciary

And if attorney has already been paid an amount in excess of amount fixed by the Court, the Court can require attorney to refund the excess (SCPA 2110[3])

Generally speaking, however, it is permissible for the fiduciary to agree to cover the shortfall -- if the court awards something less than the full “agreed to” fee, the fiduciary can agree to be individually liable for the same

Need to spell this out clearly in the retainer agreement

Risk of losing client

B. Legal fees of an attorney/executor

1. Generally, an attorney can serve both as executor and as attorney for the estate

a. SCPA § 2307 provides that when an attorney acts as an executor, “the court must allow to him such compensation for his legal services as appear to the court to be just and reasonable and in addition thereto it must allow [statutory] commissions.”

b. Caveat - SCAP § 2111 provides that an attorney acting as sole executor may not take an advance payment of legal fees without prior court approval.

(i) He/she can if there is a non-attorney co-fiduciary and if all co- fiduciaries consent or if the instrument (the will or trust) so permits

C. So, regardless of the agreement between the fiduciary (the client) and the attorney, a court has the authority to fix attorney’s fees payable from the estate

NYSBA Anatomy of a Trust: Ethics Outline 18 March 2017

328 1. SCPA § 2110 gives the Court authority to fix and determine the compensation of attorneys for services rendered to a fiduciary or to a beneficiary, legatee, distributee, etc.

2. It is up to the Court to determine the propriety of and amount of legal fees to be paid by an estate of trust

3. True regardless of whether the attorney has an agreement with the fiduciary -- his client -- regarding the amount of the fee and regardless of whether anyone objects to the fee.

a. This is especially true where, as here, those who are, in effect, paying most of the legal fee are beneficiaries who did not enter into a retainer agreement with counsel.

b. The leading case on this subject is Stortecky v. Mazzone, 85 NY2d 518, 526 [1995]).

(i) There, the Court of Appeals held that a Surrogate has the “inherent power” to inquire into the reasonableness of counsel fees even though agreed upon by the executor and assented to by the beneficiaries.

(ii) The Court cautioned Surrogate’s to exercise their power sparingly, cognizant of the dangers of sua sponte reviews (e.g., causing the estate and its beneficiaries unnecessary expense and delay; seriously damaging the reputation of the attorney or executor involved by creating unwarranted suspicions of overreaching or misconduct; and “the appearance of meddling may diminish the dignity of the court itself”).

4. The Court decides what legal fees are to be paid by an estate or trust

a. Proceeding to fix attorney’s fees may be commenced by the attorney or any “person interested” (i.e., person with a monetary interest in the estate or trust)

b. Procedure governed by section 207.45 of the Uniform Rules for the Surrogate’s Courts (22 NYCRR § 207.45)

c. That rule requires the filing of an affidavit (or affirmation) of legal services which must provide various information.

NYSBA Anatomy of a Trust: Ethics Outline 19 March 2017

329 (i) Including among this information is whether the attorney waives a formal hearing as to compensation.

(ii) Where the fee request is disputed, there can be discovery and, ultimately, a hearing on the issue

D. Factors the court look at in determining an appropriate fee

1. The guideposts for making a fee determination have been set forth by Matter of Potts (213 AD 59 [4th Dep’t 1925] and Matter of Freeman (34 NY2d 1 [1974]) as follows:

a. the results obtained;

b. the difficulties involved in the matters in which the services were rendered;

c. the nature of the services rendered;

d. the amount involved or the size of the estate;

e. the professional standing of the counsel; and

f. the time spent.

2. Many early cases hold that of the foregoing factors, time is the least important factor;

a. a percentage fee, particularly in large estates, is not appropriate, as it often results in a fee which bears no relation to the actual work done.

3. Attorney/Executor - where an attorney is the executor and also renders legal services to the estate, the Court will review the fee and commission to make sure there is no overlap

a. An attorney cannot seek to charge an estate legal fees for services that are executorial in nature

(i) Services “executorial in nature” has been defined to mean those services performable by a layperson

b. It is also within the court’s discretion to determine whether an executor properly hired an accountant to perform accounting services;

NYSBA Anatomy of a Trust: Ethics Outline 20 March 2017

330 if the court determines that an accountant was not necessary, it will not approve the payment of accounting fees from the estate

c. Absent unusual complexity, the preparation and filing of fiduciary and estate tax returns are among the duties expected of the attorney for the fiduciary and no additional compensation for an accountant will be permitted without a corresponding reduction in attorney’s fees. Estate of Schoonheim, 158 AD2d 183 (1st Dep’t 1990).

(i) Purpose of this rule is to avoid duplication. But courts have held that where the legal fees do not include compensation for services rendered by the accountant, there is no duplication and the legal fee is not automatically reduced by the accounting fee (Matter of Tortora, NYLJ, July 19, 1995, at 26).

E. Contingency fees

1. Just as retainer agreements providing for a specific hourly fee or fixed fee are not binding on the courts, the same is true of contingency fee agreements; the court is still required to apply the Potts/Freeman factors to determine the reasonableness of the contingency fee before permitting it to be paid from an estate

a. Relatively new case, Matter of Talbot,84 AD3d 967 (2d Dep’t 2011)

(i) Objectant in a probate contest agreed to pay her lawyer a contingency fee capped at a specified amount, but after settlement sought to have the Surrogate reduce the fee.

(ii) Surrogate granted SJ in favor of the attorney, awarding the total fee sought, approximately $590,000, finding no indication that the contingency fee agreement was fraudulently procured and that the petitioner apparently was competent to enter into the agreement

(iii) 2d Dep’t reversed finding that in addition to analyzing whether the contingency fee agreement was fraudulently procured, and whether the petitioner apparently was competent to enter into the agreement, the Surrogate should have determined the reasonableness of the fee, notwithstanding the contingency fee agreement, applying the Freeman/Potts factors

NYSBA Anatomy of a Trust: Ethics Outline 21 March 2017

331 (1) On remand, the Surrogate did so, and in a decision published in the NYLJ a few weeks ago, analyzed all the relevant factors and awarded what the court considered to be a reasonable fee -- $590,000

F. Another word on Appellate Review

1. Orders fixing attorneys’ fees are reviewed for an abuse of discretion.

2. As with any discretionary determination, it might be said that reversals are the exception, not the norm

a. It has been said to be an abuse of discretion for a surrogate to ignore any of the Potts factors or to improperly apply them

b. It has also been said to be an abuse of discretion where the surrogate fails to articulate a rationale or offer a basis of calculation for a reduction of a fee award or fails to consider the customary fees charged for services similar to those rendered by the lawyers seeking fees from the Estate

VII. Conclusion A. Get to Know the Rules Applicable to Representing Fiduciaries 1. Read the Rules and Comments 2. Read the Law Journal, subscribe to the Ethics Opinions of the State, City and County Bar Associations 3. Go Beyond the CLE and good standing requirements of 4 Ethics Credits Every Two Years

NYSBA Anatomy of a Trust: Ethics Outline 22 March 2017

332

The Application of the Attorney-Client Privilege in Revocable Trust Contests

by

Robert M. Harper, Esq.

Farrell Fritz, P.C. Uniondale, L.I.

333

334 The Application of the Attorney-Client Privilege in Revocable Trust Contests By Robert M. Harper

With the passage of time, revocable trusts have privilege “is to be strictly construed in keeping with its gained increased prevalence in estate planning and, purpose.”7 thus, also have been the subject of more contests. Mindful of the foregoing principles, there are ex- While the application of the attorney-client privilege to ceptions to the attorney-client privilege, which govern communications between the attorney-draftsperson of in proceedings concerning the validity of testamentary a testamentary instrument and the testator in will con- instruments and revocable trusts. The exceptions are tests is the subject of a statutory exception, there is no discussed below. statutory guidance governing whether a similar excep- tion applies with respect to communications between the attorney-draftsperson of a revocable trust and the The Application of the Attorney-Client settlor in revocable trust contests. In the absence of Privilege in Proceedings Concerning the such statutory guidance, courts have been left with Probate, Validity, and Construction of little authority on which to decide whether—and to Testamentary Instruments what extent—such an exception to the attorney-client privilege should apply in revocable trust contests. This In addressing the attorney-client privilege, the article addresses that issue. New York Legislature enacted CPLR 4503(b), which contains a statutory exception to the privilege.8 The ex- ception provides that, in a proceeding concerning the The Attorney-Client Privilege probate, validity, or construction of a will, “an attor- As codifi ed in Rule 4503 of the New York Civil ney…shall be required to disclose information as to the Practice Law and Rules (CPLR), the attorney-client preparation, execution or revocation of any Will or oth- privilege provides that “an attorney…shall not dis- er relevant instrument….”9 That is, except to the extent close” confi dential communications between the that disclosure of a privileged communication “would attorney and a client “arising as an incident of the at- tend to disgrace the memory of the decedent.”10 torney’s professional employment,” absent a waiver When the statutory exception applies, an “attorney of the privilege by the client.1 The attorney-client may testify [and disclose documentation] concerning privilege—which is the oldest among the common-law the preparation of a will or other relevant documents[,] evidentiary privileges—facilitates open communica- even if the will or documents are not those actually tion between an attorney and client, ensuring that the fi led for probate and contested.”11 As such, in Matter client (a) fully confi des in his or her attorney; and (b) is of Soluri, the Surrogate’s Court held that CPLR 4503(b) secure in the knowledge that the confi dences the client authorized an attorney—who (a) prepared advance shares with his or her attorney during the representa- directives, but not a will, for the testator (because the tion will remain private.2 testator told the attorney that she did not want a will); The privilege survives the death of a client, such and (b) spoke with the testator in the weeks leading up that the client’s attorney has a duty to maintain the to the preparation and execution of the propounded confi dentiality of privileged communications even will that another attorney drafted—to testify as to the after the client’s demise.3 Insofar as the fi duciary of a privileged communications the non-drafting attorney deceased client’s estate stands in the client’s shoes, the had with the testator.12 The court explained that the fi duciary may waive the attorney-client privilege on non-drafting attorney’s fell within the statu- behalf of the deceased client’s estate.4 tory exception to the attorney-client privilege.13 Moreover, to the extent that the attorney-client Of course, the statutory exception to the attorney- privilege shields relevant information from disclosure, client privilege is a “narrow one.”14 It generally does tension exists between the public policies favoring not apply in proceedings other than those that concern liberal discovery and withholding relevant evidence the probate, validity, or construction of a testamentary under the privilege.5 This is because the withholding instrument, such as discovery proceedings, kinship of relevant information under the attorney-client privi- proceedings, and proceedings to determine the validity lege “hampers the truth-fi nding process,” which “is at of a claim against a decedent’s estate.15 the heart of our judicial system.”6 Consequently, Surro- The statutory exception also does not authorize gate’s Courts have recognized that the attorney-client a blanket waiver of the attorney-client privilege with respect to any and all confi dential communications

NYSBA Trusts and Estates Law Section Newsletter | Spring 2015 | Vol. 48 | No. 1 7 335 between an attorney and a client.16 For example, in been argued, in at least one case, that the statutory Matter of Delano, the objectants in a probate proceed- exception to the attorney-client privilege codifi ed in ing appealed from a decree admitting a testamentary CPLR 4503(b) should be extended to revocable trusts instrument to probate, claiming that the Surrogate’s because revocable trusts function as wills and carry Court committed reversible error by excluding from with them many of the same rights and remedies as evidence—on privilege grounds—the testimony of an wills do.22 Indeed, much like testamentary instruments, attorney who did not draft the propounded instrument, revocable trusts “are ambulatory during the settlor’s but was prepared to testify as to the intentions the tes- lifetime, speak at death to determine the disposition tator expressed to the attorney years after the testator of the settlor’s property, may be amended or revoked executed the propounded instrument.17 The objectants without court intervention and are unilateral in na- asserted that the attorney’s testimony fell within the ture.”23 statutory exception set forth in CPLR 4503(b), but nei- Describing that argument as “persuasive,” the Sur- ther the Surrogate’s Court nor the Appellate Division rogate’s Court that considered it found that the court credited that argument.18 need not decide whether the statutory exception to Nevertheless, even in those circumstances where the attorney-client privilege set forth in CPLR 4503(b) the statutory exception codifi ed in CPLR 4503(b) does governs in revocable trust contests. The court reasoned not apply, courts have recognized the following non- that the attorney-client privilege “does not apply in a statutory exception to the attorney-client privilege: dispute between parties as to an interest in property in a probate proceeding, commu nications between a which [the parties] claim through the same dece- testator and an attorney who provided estate-planning dent.”24 Consequently, the court directed the attorney- services to the testator, but which did not concern the draftsperson of an alleged amendment to a revocable instrument offered for probate, should not be shielded trust to testify as to the privileged communications he from discovery “in controversies between [the testa- purportedly had with the settlor.25 tor’s] heirs at law, devisees, legatees or next of kin….”19 The underlying rationale is that the testator “would There being no statutory guidance and only one re- expect the confi dentiality of such communications to ported case concerning the application of the attorney- be lifted in the interests of resolving disputes over” the client privilege in revocable trust contests, it remains testator’s estate plan.20 Thus, in Matter of Bronner, the to be seen how the Surrogate’s Courts other than the Surrogate’s Court directed an attorney—who merely one discussed above will address this issue. However, consulted with the testator shortly before the testa- it is highly unlikely that, in revocable trust contests, the tor retained another attorney to prepare her will—to courts would allow attorneys who prepare revocable testify as to his privileged communications with the trusts to shield from discovery the confi dential commu- testator, despite that the testimony fell outside of CPLR nications they have with concerning the trusts. 4503(b).21 Conclusion While the exceptions to the attorney-client privi- lege that apply in proceedings concerning the probate, The law governing revocable trusts is evolving; validity, and construction of wills are well settled, the and, as it relates to the attorney-client privilege and its same cannot be said for the application of the attorney- application in revocable trust contests, that is equally client privilege in contests concerning revocable trusts. true. To the extent that disputes concerning the validity The evolving body of case law concerning revocable of revocable trusts become more common, so too will trusts and its impact on the attorney-client privilege is questions concerning the application of the attorney- discussed below. client privilege and any exceptions thereto. It will be interesting to see how the Surrogate’s Courts resolve these privilege issues. The Exception to the Attorney-Client Privilege in Revocable Trust Contests Endnotes As revocable trusts have become increasingly pop- 1. CPLR 4503; Matter of Colby, 187 Misc. 2d 695, 696-97, 723 ular as estate-planning devices, so too have disputes as N.Y.S.2d 631 (Sur. Ct., N.Y Co. 2001). to the validity of such instruments. With the increased 2. Matter of Bronner, 7 Misc. 3d 1023(A), at *2-3, 801 N.Y.S.2d 230 prevalence of revocable trust contests, issues attendant (Sur. Ct., Nassau Co. 2005). to the attorney-client privilege’s application have arisen 3. Mayorga v. Tate, 302 A.D.2d 11, 11-12, 752 N.Y.S.2d 353 (2d Dep’t in such disputes. 2002). In contrast to disputes concerning the probate, 4. See id. validity, or construction of wills, there is no statutory 5. Colby, 187 Misc. 3d at 696-97. exception to the attorney-client privilege that explicitly 6. See id. applies to revocable trust contests. However, it has 7. See id. at 697.

8 NYSBA Trusts and Estates Law Section Newsletter | Spring 2015 | Vol. 48 | No. 1 336 8. CPLR 4503(b). 18. See id. 9. See id. 19. Bronner, 7 Misc.3d 1023(A), at *3-4. 10. See id. With respect to material that is subject to the attorney- 20. See id. client privilege, there is a dearth of reported case law 21. See id. concerning the disclosure of privileged material that would tend to disgrace the testator’s memory. Cf. Matter of Roll, 22. Matter of Leddy, 43 Misc. 3d 1214(A), at *1, 988 N.Y.S.2d 523 N.Y.L.J., Apr. 4, 1994, p. 22, col. 1 (Sur. Ct., Bronx Co.) (directing (Sur. Ct., Nassau Co. 2014). Based upon Leddy, the Trusts an in camera review to determine whether the requested and Estates Law Section’s and Governmental documents would disgrace the testator’s memory). However, Relations Committee has proposed amending CPLR 4503(b) to courts have provided more guidance as to the discovery of extend the statutory exception to the attorney-client privilege material that would tend to disgrace a testator’s memory in to proceedings concerning the validity and construction of analyzing CPLR 4504(c), which addresses physician-patient revocable trust instruments. confi dentiality and mirrors CPLR 4503(b), as it relates to 23. Matter of Davidson, 177 Misc. 2d 928, 930, 677 N.Y.S.2d 729 (Sur. disgracing the testator’s memory. Cf. Matter of Stern, N.Y.L.J., Ct., N.Y. Co. 1998); Matter of Tisdale, 171 Misc. 2d 716, 721, 655 Nov. 24, 2014, p. 24 (Sur. Ct., N.Y. Co.) (addressing CPLR 4504). N.Y.S.2d 809 (Sur. Ct., N.Y. Co. 1997). 11. Matter of Soluri, 40 Misc. 3d 1207(A), at *1-5, 975 N.Y.S.2d 712 24. Leddy, 43 Misc. 3d 1214(A), at *1. (Sur. Ct., Nassau Co. 2013). 25. See id. 12. See id. 13. See id. Robert M. Harper is an associate at Farrell Fritz, 14. Matter of Bronner, 7 Misc. 3d 1023(A), at *3, 801 N.Y.S.2d 230 (Sur. Ct., Nassau Co. 2005). P.C., concentrating in the fi eld of estate and trust litigation. Mr. Harper is a Co-chair of the Trusts and 15. Matter of Trotta, 99 Misc. 2d 278, 281, 416 N.Y.S.2d 179 (Sur. Ct., Bronx Co. 1979). Estates Law Section’s Legislation and Governmental Relations Committee and a Special Professor of Law 16. Matter of Trump, N.Y.L.J., Apr. 7, 2000, p. 30, col 1 (Sur. Ct., Queens Co.). at Hofstra University’s Maurice A. Deane School of 17. Matter of Delano, 38 A.D.2d 769, 327 N.Y.S.2d 908 (3d Dep’t Law. 1972).

Fiduciary Accounting System Service Bureau Professional Fiduciary Accounting Software Outsource to TEdec for all your TEdec provides attorneys, CPAs and other professionals with the most proven, reliable fiduciary accounting needs and full featured Trust and Estate Accounting Our Professional Team Can Provide: Software on the market. h Data Entry One-time data entry ensures h Court Inventories accuracy while saving time in h Accountings - Formal or Informal preparing: h Court Inventories & Accountings h Releases

h Management Reports All compliant with the official forms for: NY, PA, NC, FL, CA, h Estate Tax & Income Tax Returns National Fiduciary Accounting Standards. by bridge to CCH ProSystems fx® and Lacerte® Tax Software h Much more! TEdec Systems, Inc. 207 Court Street, Little Valley, NY 14755 TEdec provides a Risk Free 100% Money Back Guarantee! Learn More. Try Us Today! Online at www.tedec.com (OLPLQDWH0LVWDNHVDQG,QFUHDVH3URÀWV Call 1-800-345-2154 ProSystems fx® is a registered trademark of CCH Corporation Lacerte® is a registered trademark of Intuit Inc. in the United States and other countries. Two Ways to Improve Yourur Trust & Estate Practice (paid advertisement)

NYSBA Trusts and Estates Law Section Newsletter | Spring 2015 | Vol. 48 | No. 1 9 337 338 New York Trusts & Estates Litigation

Recent Amendment Creates Further Exception to Attorney-Client Privilege

By Ilene Cooper on September 8, 2016

POSTED IN

On August 19, 2016, Governor Cuomo signed into law an amendment to CPLR §4503(b) which creates another exception to the attorney-client privilege in the case of revocable trusts. The first such exception, initially enacted pursuant to the provisions of CPA 354 (the predecessor to CPLR §4503[b]), provides that the privilege will not apply “in any action involving the probate, validity or construction of a will” (see CPLR §4503[b]). The 2016 exception expands CPLR §4503(b) to now include actions, after the grantor’s death, involving revocable trusts.

The purpose of the attorney-client privilege is to promote the use of legal representation by assuring clients that they may freely confide in their counsel without concern that such confidences may be divulged to outsiders (see Matter of Colby, 187 Misc 2d 695 [Sur Ct, New York County 2001], citing Priest v Hennessey, 51 NY2d 62, 67-68 [1980]). Nevertheless, to the extent it shields evidence from disclosure, it obstructs the fact-finding process (see Matter of Colby, 187 Misc 2d 695, 697).

With this balanced approach in mind, the recent bill amending CPLR §4503(b) finds its justification in the pre-existing exception to the attorney-client privilege in the case of probate contests, and the fact that revocable trusts serve as the equivalent of wills. However, it should be noted that the exception only applies after the death of the grantor, 339 in recognition of the fact that a party, other than the grantor, has no standing to challenge a revocable trust during the grantor’s lifetime (see N.Y.S. Assembly Memorandum in Support of Legislation, citing Matter of Davidson, 177 Misc 2d 928, 930 [Sur Ct, New York County 1998]).

Related Posts

Jury in Surrogate’s Court Removal Proceedings

Lessons to be Learned From the Power of Attorney

Representation of Charities by the Attorney General

Contingency Fees - Size Matters

In re Lawrence: What the Court of Appeals Says About Gifts from Client to Lawyer

Copyright © 2017, Farrell Fritz, P.C. All Rights Reserved.

340 NY CLS CPLR § 4503

Current through 2017 released chapters 1-7

New York Consolidated Laws Service > Civil Practice Law And Rules > Article 45 Evidence

§ 4503. Attorney

(a) 1. Confidential Communication Privileged.Unless the client waives the privilege, an attorney or his or her employee, or any person who obtains without the knowledge of the client evidence of a confidential communication made between the attorney or his or her employee and the client in the course of professional employment, shall not disclose, or be allowed to disclose such communication, nor shall the client be compelled to disclose such communication, in any action, disciplinary trial or hearing, or administrative action, proceeding or hearing conducted by or on behalf of any state, municipal or local governmental agency or by the legislature or any committee or body thereof. Evidence of any such communication obtained by any such person, and evidence resulting therefrom, shall not be disclosed by any state, municipal or local governmental agency or by the legislature or any committee or body thereof. The relationship of an attorney and client shall exist between a professional service corporation organized under article fifteen of the business corporation law to practice as an attorney and counselor-at-law and the clients to whom it renders legal services. 2. Personal Representatives. (A) For purposes of the attorney-client privilege, if the client is a personal representative and the attorney represents the personal representative in that capacity, in the absence of an agreement between the attorney and the personal representative to the contrary: (i) No beneficiary of the estate is, or shall be treated as, the client of the attorney solely by reason of his or her status as beneficiary; and (ii) The existence of a fiduciary relationship between the personal representative and a beneficiary of the estate does not by itself constitute or give rise to any waiver of the privilege for confidential communications made in the course of professional employment between the attorney or his or her employee and the personal representative who is the client. (B) For purposes of this paragraph, “personal representative” shall mean (i) the administrator, administrator c.t.a., ancillary administrator, executor, preliminary executor, temporary administrator or trustee to whom letters have been issued within the meaning of subdivision thirty-four of section one hundred three of the surrogate’s court procedure act, and (ii) the guardian of an incapacitated communicant if and to the extent that the order appointing such guardian under subdivision (c) of section 81.16 of the mental hygiene law or any subsequent order of any court expressly provides that the guardian is to be the personal representative of the incapacitated communicant for purposes of this section; “beneficiary” shall have the meaning set forth in subdivision eight of section one hundred three of the surrogate’s court procedure act and “estate” shall have the meaning set forth in subdivision nineteen of section one hundred three of the surrogate’s court procedure act. (b) Wills and revocable trusts. In any action involving the probate, validity or construction of a will or, after the grantor’s death, a revocable trust, an attorney or his employee shall be required to disclose information as to the preparation, execution or revocation of any will, revocable trust, or other relevant instrument, but he

341 NY CLS CPLR § 4503

shall not be allowed to disclose any communication privileged under subdivision (a) which would tend to disgrace the memory of the decedent.

History

Add, L 1962, ch 308, eff Sept 1, 1963; amd, L 1977, ch 418, § 1; L 2002, ch 430, § 1, eff Aug 20, 2002; L 2016, ch 262, § 1, eff Aug 19, 2016.

Annotations

Notes

Prior Law:

Earlier statutes: CPA §§ 353, 353–a, 354; CCP §§ 835, 836.

Advisory Committee Notes:

This section makes no substantive changes in the former law.

Subd (a). CPA § 353 was amended and a new § 353-a was added in 1958 as a result of Lanza v N.Y.S. Joint Legis. Comm. 3 NY2d 92, 143 NE2d 772 (1957). NY Laws 1958, c. 851; see Report of the Joint Legislative Committee on Privacy of Communications and of Private Investigators 37–38 (NY Leg Doc No. 9 (1958)); Prashker, 1958 Civil Practice Changes, 30 NYSB Bull 173, 178 (1958). Two changes were made in § 353: addition of the words “disclose, or” and addition of the eavesdropper provision. The beginning of § 353-a (up to but not including the words “nor shall the client”) was identical with the beginning of § 353 as amended, and the only remaining differences were that § 353-a added (1) the phrase “nor shall the client be compelled to disclose”; (2) that § 353-a applied to testimony in the specified nonjudicial proceedings; and (3) that § 353-a contained an additional provision preventing disclosure by the governmental agency. Subd (a) of this section covers both sections as amended by the 1958 legislation. It includes the words “disclose, or” and the eavesdropper provision that were added to § 353, plus the three additional matters covered by § 353-a.

Subd (b) consists of those portions of former § 354 which affected the attorney-client privilege. Minor language changes have been made but the substance is unaffected. It is clear that former § 353 and those portions of former § 354 embodied in this subdivision must be read together. See In re Matheson’s Will, 283 NY 44, 27 NE2d 427 (1940). Combining them in one section makes this apparent. The phrase “shall be required to disclose information” is substituted for “shall not disqualify . . . from becoming a witness” to make it uniform with the phraseology in former § 352 (“may be required to testify”) and 354 (“may disclose”). The meaning is the same in all instances, viz.: if the testimony is otherwise admissible, the witness may not refuse to answer on the ground of privilege.

Amendment Notes

The 2016 amendment by ch 262, § 1, in (b), added “and revocable trusts” to the section heading, added “or, after the grantor’s death, a revocable trust,” and added “revocable trust.”

Commentary

PRACTICE INSIGHTS:

DEVELOPMENTS IN THE AREA OF ATTORNEY/CLIENT PRIVILEGE.

By Andrew L. Martin, Chief Court Attorney, Nassau County Surrogate’s Court.

342 S T A T E O F N E W Y O R K ______7807 I N S E N A T E May 12, 2016 ______Introduced by Sen. BONACIC -- read twice and ordered printed, and when printed to be committed to the Committee on Codes AN ACT to amend the civil practice law and rules, in relation to attor- ney requirements regarding revocable trusts THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: 1 Section 1. Subdivision (b) of section 4503 of the civil practice law 2 and rules is amended to read as follows: 3 (b) Wills AND REVOCABLE TRUSTS. In any action involving the probate, 4 validity or construction of a will OR, AFTER THE GRANTOR'S DEATH, A 5 REVOCABLE TRUST, an attorney or his employee shall be required to 6 disclose information as to the preparation, execution or revocation of 7 any will, REVOCABLE TRUST, or other relevant instrument, but he shall 8 not be allowed to disclose any communication privileged under subdivi- 9 sion (a) which would tend to disgrace the memory of the decedent. 10 S 2. This act shall take effect immediately.

EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD15472-01-6

343 NOTES

344

345 NOTES

346