Top Ten Estate Planning Mistakes and How to Avoid Them

November 5, 2014

Lauren A. Jenkins, Esquire Melinda Merk, Regional Trust AdvisorOffit Kurman, P.A. SunTrust Private Wealth Management8000 Towers Crescent Drive, Suite 1450 8330 Boone Boulevard, Suite 700Vienna, Virginia 22182 Vienna, Virginia 22182703‐745‐1821 703‐442‐1534ljenkins@offitkurman.com melinda.merk@suntrust.com

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1. Doing Nothing, or Doing it Yourself• It’s not “all boilerplate”

– Most estate planning attorneys spend a considerable amount of time creating and updating their documents/forms, which are then customized for each client based on their specific situation and the attorney’s knowledge and experience

• Doing nothing only postpones the inevitable and leaves one’s spouse and family to resolve matters, during an already emotional and difficult time

– Important to share basic information (e.g., location of documents, account statements, etc.) with designated Executor and/or Trustee

• Doing it yourself and/or using online forms inevitably leads to mistakes or omissions that can no longer be corrected once an individual becomes incapacitated or deceased

– Can lead to unnecessary legal fees, taxes and/or litigation, and otherwise defeat your intentions and prevent orderly distribution and management of your assets

• Failing to periodically update documents to take into account Federal and State tax and non-tax law changes and upon certain other events (e.g., moving to another state, getting married/divorced etc.), can also create unnecessary complications

• Estate planning attorneys can help to foster client understanding and engagement in the planning process by the following:

– Double-checking correct spelling of client names and other personal information in document

– Providing table of contents, summary pages, and appropriate headings within document– Providing summary flowchart of estate plan and overview letter

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2. Failing to Properly Fund Revocable Trust

• Primary purposes of a revocable trust (incapacity planning, avoiding probate, court supervision, and preservation of privacy ) will be defeated if assets are not re-titled into name of revocable trust

• Failing to convey out-of-state real estate to revocable trust can result in ancillary probate (consult with out-of-state counsel)

• Don’t forget about re-titling closely-held business interests into revocable trust

• If retirement account is made payable to revocable trust (e.g., as contingent beneficiary f/b/o minor children), be sure trust contains necessary provisions. (see Top Ten Item #9)

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2. Failing to Properly Fund Revocable Trust (cont’d)

• Joint spousal property is generally divided between and transferred to each spouse’s separate revocable trust (unless Joint Revocable Trust is used, see Top Ten Item #3)– Assets remaining in deceased spouse’s revocable trust can

be used to fund Credit Shelter Trust (CST) and exempt from estate tax using the deceased spouse’s unused exclusion (DSUE) amount

– Portability election may alleviate necessity of funding CST, but compelling reasons may still exist for state estate tax, GST tax purposes, and other non-tax benefits of CST

– Potential complications after first spouse’s death if partial interest in primary residence or vacation home is used to fund CST or Marital Trust

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3. Using a (Poorly Drafted) Joint Trust

• Despite any express terms of the trust directing otherwise, separate shares of joint vs. separate property will likely not be maintained, which can lead to a host of marital and/or tax issues during the spouses’ joint lifetime and after the first spouse’s death

– Caution: Different rules and advice may apply if the couple was previously domiciled in a community property state and have a joint revocable trust

• Can result in inadvertent gift tax consequences upon contribution of separate/unequal amounts of property, if only a joint vs. unilateral revocation power is retained or if non-contributing spouse is a non-US citizen

• Can be difficult to determine what portion of the trust assets are includible in the estate of the first spouse to die (Deceased Spouse) for estate and income tax purposes

– Consider using “estate equalization” joint trust whereby each spouse is deemed to own one-half of the trust assets, unless the spouses expressly direct otherwise

• Can more easily result in inadvertent acceptance of benefits andcommingling of assets by surviving spouse that could prevent qualified disclaimer upon death of Deceased Spouse

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• Can result in inclusion of all or a portion of the Credit Shelter Trust (CST) in the surviving spouse’s estate to the extent that assets used to fund CST cannot be traced to Deceased Spouse

• Can be cumbersome or overly restrictive to administer after Deceased Spouse’s death, particularly if surviving spouse does not retain express right to revoke over Survivor’s Share– What if surviving spouse has different beneficiaries than

Deceased Spouse, or wants to amend other terms of the trust?

– If possible, it is generally advisable for the surviving spouse to transfer his or her share of the trust assets (Survivor’s Share) to a newly-created revocable trust

3. Using a (Poorly Drafted) Joint Trust (cont’d)

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4. Leaving Assets Outright, or Requiring Mandatory Trust Distributions, to Children

• Mandatory outright distributions to beneficiary (lump sum or gradual upon attaining certain ages) destroys asset and spendthrift protections otherwise available for assets held in a discretionary trust

• Including flexibility and express direction to trustee in trust document with respect to discretionary distributions is key– Expressly state material purpose of trust and/or provide side

letter from settlor to trustee (e.g., to favor current vs. remainder beneficiaries)

– Provide milestones for discretionary distributions (marriage, first home, starting business, etc.)

– Consider including incentive and substance abuse provisions, and specifying whether outside resources of the beneficiary should be considered

– Consider using independent/professional trustee and/or distribution committee

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5. Improper Selection of Trustee, and Failing to Name a Trust Protector

• Duties of a trustee– Manage/preserve trust assets in accordance with trust document and applicable

state law(s)– Duty of impartiality/good faith– Determination of trust accounting income and distributable net income (DNI)

• Not the same as taxable income – Capital gains are generally allocable to principal and taxed to trust

• Allocation of receipts and disbursements between income and principal in accordance with trust document and applicable UPAIA [Va. Code §64.2-1000, et seq.]

– Trustee commissions and investment management fees are generally allocable 50/50 unless trust document provides otherwise

– IRA RMDs» 10% of RMD is generally allocated to income, 90% to principal » Net income from IRA account must be allocated to income, or surviving spouse must be

permitted to compel trustee to withdraw this amount, under QTIP rules [Rev. Rul. 2000-2)• Power to adjust and/or unitrust conversion

– Managing impact of higher marginal income tax rate and Medicare surtax on undistributed trust income and capital gains

– Recordkeeping and tax reporting/elections– Providing accountings to beneficiaries as required by trust document and state law

and/or Uniform Trust Code (UTC), if applicable• Starting statute of limitation for beneficiary claims vs. settlor’s desire for privacy

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• Surviving Spouse may not always be the best or most qualified person to name as Trustee, particularly in 2nd+ marriage situations with children from prior marriage

• Naming an individual (e.g., spouse, relative, or friend) as sole trustee, even if the individual is qualified/skilled in the duties of a fiduciary, is time-consuming and leaves individual open to potential conflicts withunhappy beneficiaries

• Naming multiple individuals (e.g., children) as co-trustees can create unnecessary administrative burdens and potential conflicts in trustee decision-making

• Naming individual (or beneficiary upon attaining certain age) and professional/institution as co-trustees allows family member or other trusted individual to provide input on distributions and can leave other administrative tasks to professional trustee

• Important to appoint Trust Protector to remove and replace trustee (with or without cause)

5. Improper Selection of Trustee, and Failing to Name a Trust Protector (cont’d)

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6. Failing to Use Pre-Nup and/or QTIP Trust to Preserve Assets for Children from Prior Marriage

• Use of Marital Agreements (prenuptial and postnuptial) can prevent disputes during life and at death

• Qualified Terminable Interest Property (QTIP) Marital Trust allows surviving spouse to be (sole) lifetime beneficiary, and directs distribution of remaining trust assets at surviving spouse’s death

• Life insurance can also be used to provide a guaranteed legacy/distribution to children at deceased spouse’s death

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7. Putting Children’s Name on Bank Accounts and Other Assets

• Often done as substitute for durable power of attorney and/or avoiding probate

• Exposes asset to child’s creditors• May result in unintended and/or unequal distributions of

assets/estate among children/intended beneficiaries• May create unintended gift tax consequences

– Adding child as joint owner on real estate (for no or inadequateconsideration) generally results in completed gift of undivided/allocable interest in the property upon delivery/filing of deed

– Adding child as joint owner on bank/investment account generallyresults in completed gift when child makes withdrawal from account not attributable to his or her contribution (if any)

• Depending on whether asset is owned as joint tenants with right of survivorship or tenants in common, all or a portion of the property will remain includible in parent’s estate – Generally, estate would be entitled to a credit for any gift tax paid

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8. Failing to Properly Name and Update Beneficiaries of Retirement Plans and Life Insurance Policies

• If a revocable trust is named as the beneficiary of a retirement plan, care must be taken to ensure the trust qualifies as a conduit trust or a see-through trust

• Life insurance ownership and beneficiary designations should be reviewed to confirm they accurately reflect the estate planning goals (e.g., naming an ILIT as owner and beneficiary)

• If no beneficiary is named, proceeds may be payable to decedent’s estate, subject to probate, and subject to creditors

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9. Failing to Fully Utilize Estate, Gift or Generation-Skipping Transfer (GST) Exemption and/or Annual Gift Tax Exclusion

• Implement annual exclusion gifting program, via outright gifts or gifts to qualified trusts, to reduce and transfer future appreciation out of estate

– Caution: Donee generally takes carryover basis in gifted asset• Obtain valuation report from qualified appraiser to provide support for

valuation discounts and adequate disclosure with regard to gifts of closely-held or other restricted interests (e.g., LLC interest, tenancy in common interests in real estate, etc.)

– File with gift tax return to start statute of limitations for gift tax purposes• Consider using life insurance owned by irrevocable life insurance trust

(ILIT) to leverage gift/estate and GST exemptions and to provide liquidity for estate taxes and other debts or expenses at settlor’s death

• Multi-generational “Dynasty Trust” (created during settlor’s lifetime or at settlor’s death) can maximize/leverage use of GST exemption and avoid additional estate taxation at 2nd generation level

• Designing irrevocable trust as “defective” grantor trust for income tax purposes (with optional toggle off power) during settlor/grantor’s lifetime allows settlor/grantor to make an additional tax-free gifts by paying income tax attributable to the trust

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10. Failing to Follow Formalities and Operational Requirements of Family LLC

• Family limited partnership or LLC can provide asset protection benefits and centralized management of family assets

• Additional estate planning benefits can be achieved by gifting interests in the entity to children and future generations (or trust for their benefit)

• IRS has been successful in challenging use of family entities for gift and estate tax purposes where the formalities and other operational requirements of the entity are not respected

• Retaining the advice of a good CPA is essential

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Speaker Bios

Lauren A. Jenkins, Esquire, Offit Kurman, P.A.

Lauren A. Jenkins focuses her practice on tax and estate planning, trust and estate administration, and tax compliance.

Ms. Jenkins represents individuals and families with creating and implementing estate plans to achieve their personal and financial objectives. Such planning often includes drafting wills, revocable trusts, and powers of attorney, as well as more advanced estate planning to preserve wealth for future generations.

Ms. Jenkins also has experience advising clients who require both domestic and international components to their estate plans. Ms. Jenkins guides clients through the complexities and nuances of trust and estate administration. She advises fiduciaries with respect to their powers and responsibilities, including filing obligations under state and federal law. Additionally, Ms. Jenkins represents beneficiaries who desire separate counsel to ensure their interests are protected and they receive their full entitlement.

Ms. Jenkins also represents clients before the IRS, including offers in compromise and voluntary disclosures to resolve noncompliance with respect to U.S. reporting obligations.

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Speaker Bios (cont’d)Melinda Merk, Regional Trust Advisor, SunTrust Bank Private Wealth Management

Melinda Merk is a Senior Vice President and Regional Trust Advisor and part of the Greater Washington Private Wealth Management team at SunTrust Bank. She focuses on providing multi-generational wealth transfer planning advice and estate and trust services to high net worth individuals, families, and business owners.

Ms. Merk has over 19 years experience in the estates and trusts area. Her prior experience includes serving clients as a Tax Director in the Personal Financial Services group at PricewaterhouseCoopers LLP, and as a Tax Manager in the National Tax Department at Ernst & Young LLP. She was also engaged in the private practice of law as a Senior Counsel in the Private Wealth Services group at Holland & Knight LLP. She has significant experience advising clients with regard to domestic and foreign trusts, family limited partnerships, grantor retained annuity trusts, dynasty trusts and other wealth transfer strategies, charitable trusts, estate and trust administration, and asset protection planning.

Ms. Merk received a B.S. (cum laude) from Shepherd College, a J.D. from the Duquesne University School of Law, and an LL.M. in Taxation (with distinction) from the Georgetown University Law Center. She is also a Certified Financial Planner.™ Ms. Merk is a member of the American Bar Association Section of Taxation, and is a past recipient of the Section’s distinguished John S. Nolan Tax Law Fellowship. She is also a member of the Estate Planning Councils for Northern Virginia and the District of Columbia. In addition, she is a member of the Shepherd University Foundation Board of Directors, and is an active supporter of the Wolf Trap Foundation for the Performing Arts.

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