November 13, 2010 in Tax News

As a business and tax attorney serving Arizona for over 30 years, the philosophy behind my legal practice has remained constant. I maintain the highest level of responsiveness to my clients’ needs, solve legal problems in the most cost-effective, yet creative manner and take on no more work than I can do well.

My practice emphasizes:

  • Tax Disputes
  • Estate Planning
  • Business Planning and Transactions
  • Business succession planning
  • Formations of corporations, partnerships and limited liability companies
  • Business acquisitions and sales
  • Taxation of real estate transactions
  • Probate
  • Individual, partnership, limited liability company and corporate taxation
  • Tax exempt organizations

Although I’m a solo practitioner, my network of lawyers with complimentary areas of expertise is extensive. Through those affiliations, my clients often are able to obtain the same breadth of expertise as they would with a large firm, but with the personal touch and attentiveness of a small firm with a client-centered environment.

Lawyer Robert Lord | Lawyer Tax

The Buy-Sell Agreement: Every Business Owner Should Have One

November 12, 2010 in Contracts

What happens if a business owner dies, withdraws from the business, or wants to sell his or her shares? Without a buy-sell agreement, the remaining owners can lose control of the business. The implementation of a buy-sell agreement, however, should be handled carefully. Having an improperly structured buy-sell agreement could be worse than having no buy-sell agreement at all.

A buy-sell agreement permits (or requires) the company or the remaining shareholders to buy back a departing shareholder’s stock. In addition to controlling ownership, a buy-sell agreement:

  • Creates liquidity for a deceased shareholder’s heirs.
  • Provides an “exit strategy” under which owners can withdraw from the business and dispose of their interests.
  • Helps avoid disputes over the value of stock by setting the price or a formula for determining the price.
  • Provides for an orderly succession of the business to family members or others.
  • Helps establish the value of the business for estate and gift tax purposes.

Buy-Sell Events

The obligation to buy or sell shares of a company typically is triggered by any one of the following events:

  • Death
  • Disability
  • Termination of Employment

In structuring a buy-sell agreement, careful consideration should be given to the circumstances under which a shareholder’s employment is terminated. A shareholder’s employment may be terminated by the company or by the shareholder. If the company terminates the employment, the termination shall may be “for cause” or “not for cause.” If the shareholder terminates his own employment voluntarily, the termination may be in the prime of his career or may be a termination in the nature of retirement. In most cases, each of the foregoing situations will call for a different set of buy-sell requirements.

In addition to the ordinary triggering events, a well-drafted buy-sell agreement also should address the bankruptcy or divorce of a shareholder.

Optional or Mandatory Purchase Requirement

For each triggering event under a buy-sell agreement, the agreement should specify whether the purchase of the departing shareholders shares is mandatory or optional. Many buy-sell agreements provide for a mandatory purchase in every situation. Quite often, however, that is not appropriate. For example, if a shareholder’s employment is terminated for cause, should the company or the remaining shareholders be forced to fund a large stock purchase? If the bankruptcy of a shareholder is addressed in a buy-sell agreement, the purchase of the bankrupt shareholder’s shares ordinarily should be optional.

Valuation of a Departing Shareholder’s Shares

Valuation of a departing shareholder’s shares is perhaps the most difficult part of structuring a buy-sell agreement. There are several options to consider. The buy-sell agreement can provide for an appraisal of the departing shareholder’s shares at the time of his or her departure. Alternatively, the buy-sell agreement can specify a formula for valuing a departing shareholder’s shares. A third option is to require the company and shareholders to agree on an annual basis what the value of a departing shareholder’s shares will be for the following year. Each valuation method has its advantages and disadvantages. For example, an appraisal requirement probably best ensures that both the remaining shareholders and the departing shareholder will be treated fairly. Appraisals, however, are expensive and the appraisal process is time consuming.

Dispute Resolution

Buy-Sell agreements can be used to implement an effective dispute resolution mechanism commonly known as a “forced buy-sell” or “shotgun buy-sell” arrangement. Under this arrangement, a shareholder may provide notice to another shareholder and state the price per share at which one will be required to buy the other’s stock. The other shareholder then is required to choose whether to be the buyer or seller at the stated price. This mechanism often allows co-shareholders who no longer get along with one another to sever their relationship in an efficient and fair manner, without the need for expensive appraisal or litigation.

Types of Buy-Sell Agreements

There are generally two types of buy-sell agreements: the cross-purchase agreement and the redemption agreement. Under a cross-purchase agreement, a departing shareholder’s stock is purchased by one or more of the other shareholders. Under a redemption agreement, the corporation purchases the stock. Often, buy-sell agreements are funded with insurance on the shareholders’ lives. If a redemption agreement is used, the corporation is the owner and beneficiary of the policy. Under a cross-purchase agreement, each shareholder purchases insurance on the lives of the other shareholders.

Although cross-purchase agreements are more difficult to administer, they may be advantageous tax wise, in two respects. First, if insurance is used to fund the purchase obligation, the purchasing shareholders essentially receive a stepped-up basis in the stock, which reduces the amount of capital gains tax they must pay if they sell the stock.

Suppose, for example, that Smith and Jones are the cofounders of ABC, Inc. Each contributes $10,000 to ABC in exchange for 50% of ABC’s stock. If ABC, Smith and Jones enter into a stock redemption agreement funded by $1,000,000 insurance policies on the lives of Smith and Jones and Smith dies when the value of the business is $2,000,000, ABC will collect the insurance proceeds and buy back Smith’s stock for $1,000,000. Jones then will own 100% of ABC’s outstanding stock, but his basis only will be $10,000. If Jones then sells his stock for $2,000,000, he will realize $1,990,000 in taxable gain.

If, instead, Smith and Jones enter into a cross purchase agreement, Jones will collect the insurance proceeds and purchase Smith’s shares, thereby increasing his tax basis to $1,010,000 (the purchase price plus his original capital contribution). If Jones sells his stock, his taxable gain will be only $990,000 rather than $1,990,000.

Second, cross-purchase agreements avoid alternative minimum tax (AMT) problems that sometime arise under redemption agreements. Life insurance proceeds generally are tax-free to the recipient, but a corporation may incur AMT liability as a result of receiving life insurance proceeds.

This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.

Estate Planning for Perfectionists and Social Engineers

November 3, 2010 in Estate Planning

The ordinary estate plan does what it is supposed to do. It provides for the distribution of wealth in a tax-efficient manner, taking into account planning for special needs, asset protection and perhaps divorce protection. Some people, however, like to take things a step further. Their attempts to achieve perfection and desired social objectives for their children have given rise to some interesting (and somewhat amusing) provisions in their estate plans. This article provides a few examples of those provisions. My purpose in writing this is not to suggest that you should incorporate such provisions in your own estate plan, but rather to provide food for thought and perhaps a chuckle or two. There is a fine line here between planning on the one hand, and obsessing, on the other. You’ll never achieve the perfect estate plan, but sometimes you can come a little closer to your goal.

“Fairness” Provisions. In most, but not all, estate plans, parents want to treat their children equally. Ordinarily, that simply means dividing their estate into equal shares when both parents have passed away. Some parents, however, question whether that is entirely fair. For example, if they die when Johnny is 23 years old and has completed his college education (funded by mom and dad, of course) and Susie is 18 and a senior in high school, is Susie getting cheated? After all, she will have to pay for her education out of her inheritance, while Johnny has already had his paid for. So what is a fair-minded perfectionist to do? The most common solution to this perceived problem is to hold the entire estate until all children are through college, making distributions only for the college and support expenses of the younger children. When the youngest child graduates, the remaining estate is split into equal shares.

The thinking does not always stop there. For example, what if one daughter’s wedding has been paid for and the other’s has not at the time both parents die? The thinking can even go the other way – that the older child is being treated unfairly. For example, suppose Johnny and Susie each inherit $1 million when Johnny is 35 and Susie is 30. If Susie then invests her inheritance for five years, she will have perhaps $1,500,000 when she turns 35, whereas Johnny only had $1 million. Believe it or not, I have had clients actually take this into account. In simple terms, they reduced Susie’s share so it would grow to equal Johnny’s share by the time she reached age 35. This is an area where the fine line between planning and obsession perhaps has been crossed.

Obviously, you do not want to over-think this issue, but there may be circumstances where equal shares of an estate are not necessarily equivalent treatment of children. But do not obsess here. It is impossible to achieve perfection.

“Anti-Laziness” Provisions. Many people are concerned that the receipt of an inheritance by a child will destroy that child’s ambition. Indeed, charities prey on this fear in people. In some cases, they convince them to leave all or substantially all their wealth to charity in order to avoid destroying their children.

Some parents are not that gullible, but they do fear the effect a large inheritance might have on their children, so they create mechanisms to make sure that their children do not rely on their inheritance as a means of avoiding hard work. My favorite provision in this area is elegant in its simplicity, although perhaps somewhat narrow-minded. My client provided that each child would have an equal share of his trust, but that the distribution paid to each child in any year would be limited to the income that child earned himself or herself. In other words, the more you work, the more you get. Of course, this mechanism may unfairly penalize a child who chooses a lower paying career, such as teaching, but it certainly does discourage laziness. I am not sure I would include such a provision in my own trust, but I do applaud the creativity.

The “Don’t Let My Siblings Cheat My Kids” Provision. This is one of my favorites. Here is the situation: My client wants to make sure his elderly parent is provided for in the event he dies prematurely. But he also wants to make sure his siblings contribute their fair shares to mom’s cause, so that his kids’ ultimate inheritance is not depleted any more than is appropriate. So, he establishes a trust for his mom’s health, support and maintenance after his death. That, by itself, is not the least bit unusual. Included in the trust, however, is a provision which conditions any distributions from the trust on equal contributions being made by his siblings to mom’s cause. So, if bro and sis don’t kick in their fair shares, mom doesn’t eat. Clever, huh?

Conclusion. There are numerous other concerns that I have seen addressed through unusual estate plan provisions – divorce, education of grandchildren, hurt feelings over selection of trustees. Although you may conclude that these concerns are better left unaddressed in your estate plan, they’re worth a passing thought.

This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.

Coping with Changes and Uncertainty in the Estate Tax

November 3, 2010 in Tax News

As most people have heard, the Federal Estate and Gift Tax Code is scheduled to change dramatically over the next several years. Under current law, each individual may pass up to $1,000,000 of wealth free of federal estate or gift tax to the next generation. That amount, the “exemption equivalent,” is scheduled to increase to $1,500,000 in 2004, then gradually increase further to $3,500,000 in 2009. In the year 2010, the estate tax is scheduled to be repealed, only to return in 2011, with an exemption equivalent of only $1,000,000. Undoubtedly, further changes will be made. Without further changes, the dilemma facing wealthy octogenarians in the year 2010 would be too unpleasant even for Congress to tolerate.

In light of the recent changes, and the uncertainties regarding the future direction of the federal estate and gift tax system, the question arises which estate and gift tax planning vehicles should you still consider and which vehicles no longer are viable? Do irrevocable life insurance trusts still make sense? How about family limited partnerships and limited liability companies? Are charitable remainder trusts as tax efficient as they used to be? This article discusses the ongoing viability of the traditional various tools used in the estate and gift tax planning process. As discussed below, the viability of some of those tools is unchanged by modifications in the tax law. The effectiveness of some of those tools, however, has been reduced sharply. In some circumstances, tools used for years by estate planners actually could result in increased tax liability.

The Traditional “A-B” or “Credit Shelter” Trust. The good news here is that the A-B or credit shelter trust generally still works, although it could prove unnecessary if the repeal of the estate tax scheduled for the year 2010 is made permanent. Prior to repeal of the estate tax, however, your use of an A-B trust to allow you to double up on your and your spouse’s exemption equivalents remains an important objective in the estate planning process.

If you have an A-B living trust from several years ago, it likely still works. It is important, however, to review the language of older A-B trusts. Some of those trusts refer to the dollar amount of the exemption equivalent at the time the trust was drafted. Trusts drafted in that manner may be deficient and they may prevent you from fully using the recent increase in the exemption equivalent.

Note also that the increase in the exemption equivalent could interfere with your non-tax concerns. For example, if you have structured your plan to allow children from a prior marriage to inherit the exemption equivalent immediately from you upon your death, rather than at the time of your spouse’s death, the scheduled increase in the exemption equivalent could cause a much larger share of your estate to pass to those children and a correspondingly smaller share of your estate to your spouse.

Charitable Remainder Trusts. The attractiveness of charitable remainder trusts certainly has diminished as a result of recent changes in the tax law. In the typical charitable remainder trust, you would contribute appreciated assets to a trust, retaining a lifetime interest in the trust and assigning the remainder interest in the trust to your children. The principal tax advantage to you would be the avoidance of capital gains tax upon the sale of appreciated assets contributed to the trust. The economic disadvantage of the charitable remainder trust to you would be the gifting of a remainder interest in the contributed assets to charity. Under current law, that disadvantage would be mitigated by the reduction in your estate tax liability resulting from the removal of the contributed assets from your estate.

Recent changes in the tax law have reduced the tax advantage of the charitable remainder trust and, at the same time, increased, or at least potentially increased, the economic disadvantage. Because the maximum rate for long-term capital gains has decreased, the value of avoiding tax on the sale of appreciated assets by a charitable remainder trust also has decreased. Because the exemption equivalent is scheduled to increase in future years and because the estate tax may be repealed entirely, the after tax “cost” of leaving a remainder interest to charity has increased.

Prior to the changes in the tax law, the tax benefit would be sufficient to warrant your consideration of a charitable remainder trust even if you had only modest charitable intent. In other words, the decision to establish a charitable remainder trust often had both a tax avoidance and a philanthropic component. Now, the charitable remainder trust should be considered only if philanthropy is your overriding objective. In other words, if you plan to leave money to charity anyhow, the charitable remainder trust may still be worthy of consideration. Otherwise, it probably is not.

Irrevocable Life Insurance Trusts. The irrevocable life insurance trust remains a viable tax planning vehicle. By having a life insurance policy held in an irrevocable trust, you are able to exclude the death benefit on the policy from your taxable estate. If the estate tax remains in place, the irrevocable life insurance trust may serve to reduce your ultimate estate tax liability. If the estate tax is repealed or if the exemption equivalent is raised to the point where your estate will not be taxable, the irrevocable life insurance trust would prove unnecessary. However, it would not result in any detriment to your situation. Thus, the only real factor to consider before establishing an irrevocable life insurance trust is cost. Any potential tax savings, however, is likely to outweigh the cost of establishing an irrevocable life insurance trust.

Qualified Personal Residence Trusts and Grantor Retained Annuity Trusts. The qualified personal residence trust and the grantor retained annuity trust both involve the use of the time value of money to generate a tax benefit. In a qualified personal residence trust, you contribute your personal residence to a trust and retain the right to use the residence for a period of years, with the remainder interest in the trust ultimately passing to your children. The grantor retained annuity trust is similarly structured except the asset contributed to the trust is something other than your personal residence and, instead of the right to use a residence, you retain an annuity payout over a term of years, with the remainder interest passing to your children after the expiration of that term. Under both structures, you are treated as having made a gift of the present value of the remainder interest. So, for example, if your house were worth $500,000 and you retained the right to live in the house for twenty years, the value of the amount of the gift would be the amount which, if invested for twenty years at the current market rate of return, would be worth $500,000.

Prior to the recent change in the tax law, the principal disadvantage of charitable remainder trusts and grantor retained annuity trusts was their complexity. Otherwise, if your estate were large enough, they represented powerful estate tax planning vehicles, with limited downside risk.

The potential repeal of the estate tax dramatically alters the equation regarding qualified personal residence trusts and grantor retained annuity trusts. If the estate tax is repealed, qualified personal residence trusts and grantor retained annuity trusts will not give rise to any tax benefit. However, they may give rise to an income tax detriment. Generally, your children may sell assets you leave to them in your estate without paying capital gains tax on the appreciation that occurred prior to the date of your death. That is because the cost basis of those assets is “stepped-up” to their fair market values as of the date of your death. If assets are contributed to a qualified personal residence trust or a grantor retained annuity trust, however, your death will not eliminate the capital gains tax to be paid upon the sale of those assets. Thus, qualified personal residence trusts and grantor retained annuity trusts have an income tax disadvantage associated with them. Prior to the recent changes in the tax law, that income tax disadvantage was more than overcome by an estate tax savings. With the possibility that the estate tax will be repealed entirely, however, that no longer is the case. Thus, it is quite possible that the establishment of a qualified personal residence trust or grantor retained annuity trust ultimately could result in a net tax disadvantage to you.

This is not to suggest that there will be no situations that warrant the use of a qualified personal residence trust or grantor retained annuity trust. However, there now is a real risk that such a trust could cost you tax-wise depending on how the estate tax ultimately is resolved. Thus, you should carefully consider this before going forward.

Family Limited Partnerships and Limited Liability Companies. The family limited partnership or limited liability company uses the illiquidity and lack of control associated with a limited partnership or limited liability company interest to create a discount in the value of stated assets, thereby reducing the ultimate estate tax liability. For example, if you contribute $1,000,000 worth of real estate to a family limited partnership and take back a 99% limited partnership interest along with a 1% general partnership interest, the limited partnership may be valued as low as $500,000 for estate tax purposes. Recently, however, the IRS has had several court victories in which they have challenged the tax treatment of family limited partnerships and limited liability companies. Nevertheless, they remain as viable planning vehicles under today’s tax law.

Family limited partnerships and limited liability companies have the same potential disadvantage associated with them as qualified personal residence trusts and grantor retained annuity trusts. That is, if the estate tax is repealed, the estate tax benefit associated with family limited partnerships and limited liability companies will be lost. At that point, it will be the IRS that will be arguing for a discount in the value of family limited partnership and limited liability company interests, in order to limit the step up in basis. The greater the discount, the more capital gains tax that ultimately will be paid upon the sale of assets contributed to a family limited partnership or limited liability company.

The downside risk associated with the family limited partnership or limited liability company, however, is not nearly as great as the downside risk associated with the qualified personal residence trust or grantor retained annuity trust. That is because the establishment of a family limited partnership or a limited liability company essentially can be reversed simply by liquidating the entity, whereas the qualified personal residence trust or grantor retained annuity trust, once created, cannot easily be undone. Thus, if a family limited partnership or limited liability company could save you significant estate tax dollars under today’s law, it still makes sense to move forward with your planning. If the repeal of the estate tax is made permanent, you may have to liquidate the partnership or limited liability company. You will have been inconvenienced and have paid some unnecessary costs, but will not have lost out tax-wise.

This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.

Avoiding Probate: Living Trusts Are Not The Only Way To Go

November 3, 2010 in Estate Planning

In the absence of any planning, your assets must be “probated” upon your death. That is, a probate case must be opened with the superior court, the court must thus determine who is entitled to receive your property and must approve the transfer of your assets to those individuals. Although the probate process in Arizona is relatively simple, it is still worthy of avoidance. It typically involves legal fees and will delay the distribution of your estate. Also, if privacy is a concern, a probate necessity makes information about your estate public information.

The most common and comprehensive vehicle for avoiding probate is the revocable living trust. If you transfer your assets to a revocable living trust during your lifetime, it will be the trust, not your estate, that owns the assets upon your death. The trust instrument will contain language, similar to language found in a will, which provides who will be entitled to distributions from the trust upon your death. The trust also will contain language that allows another individual (or perhaps a corporation) to serve as trustee should you become incapacitated. That will allow you to avoid a conservatorship in the event of your incapacity.

If you have a substantial estate, the revocable living trust almost undoubtedly will be the way to go. But what if your estate is not that substantial and you do not want to pay the attorney fees involved in establishing a living trust? There are alternatives.

The most common alternative is the joint titling of assets. For example, you want your house to pass to your son, so you title the house in your name and your son’s, as joint tenants with right of survivorship. Thus, upon your death, the house passes to him outside of the probate process. The same mechanism can be used on bank accounts, brokerage accounts and automobiles.

There is a pitfall associated with joint titling of assets, however. If your tenant (in this case, your son) has problems with creditors, his interest as a joint tenant can be seized. Also, the establishment of a joint tenancy is an irrevocable act. If you have a falling out with your son, you cannot undo the gift you made to him. Finally, if you were to title your residence in joint name, then sell the residence, you could jeopardize one-half of the exclusion from gain for which you otherwise would qualify.

There may be a better alternative. For real property, you may file a beneficiary deed. A beneficiary deed simply states who is entitled to the property upon your death. It is entirely revocable during your lifetime. Similarly, bank accounts and brokerage accounts may contain a transfer-on-death designation. Again, the designation is entirely revocable during your lifetime. It simply states who is entitled to the contents of the account upon your death. These vehicles avoid the risks associated with joint tenancies. Note that you are not required to name only one beneficiary on a beneficiary deed or transfer-on-death designation. For example, you could name all of your children, in equal shares.

In the case of very small estates, there is an exemption from probate for up to $50,000 in assets. That exemption sometimes is sufficient to avoid probate on those assets for which no probate avoidance device is appropriate.

Lastly, pay attention to beneficiary designations on life insurance policies, IRA’s and retirement plans. If you fail to name a beneficiary, your estate will be the beneficiary and a probate will be required. The beneficiary designations on IRA’s and retirement plans should be carefully considered, as there are significant income tax considerations associated with beneficiary designations. When considering beneficiary designations on life insurance policies, consider whether it’s possible the life insurance proceeds will cause your estate to be taxable. If that is the case, consider whether an insurance trust is appropriate.

Probate also may be required if you become incapacitated and a conservator must be appointed to manage your assets. Conservatorships can be expensive and should be avoided if at all possible. Again, the living trust is the most common vehicle for avoiding a conservatorship. There is one alternative, however, if you want to avoid the cost of establishing a living trust. A durable power of attorney, if worded correctly, will allow one or more individuals you name manage your assets in the event of your incapacity. Note that a durable power of attorney may be made effective only in the event of your incapacity or may be made effective upon signing. The advantage of having the power of attorney become effective only upon your incapacity is the avoidance of unintended use of the power by your agent. Ordinarily, however, that is not a concern. The advantage of having a durable power of attorney become effective upon signing is that it allows your agent to act on your behalf without having to prove that you are incapacitated.

To sum up, if a living trust is not appropriate for you, consider your alternatives. Quite often, through a combination of powers of attorney, beneficiary deeds, transfer-on-death designations, beneficiary designations and other measures, probate can be avoided without a living trust. In many cases, you can avoid costs and delay by employing those alternative measures.

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This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.

The Practical Side of Estate Planning

November 3, 2010 in Estate Planning

By Robert J. Lord

I like to view estate planning as having two components. One component, and the one to which all estate planners and their clients pay careful attention, is the tax component. Estate planners do a fine job on tasks such as maximizing the benefits of their clients’ unified tax credits and generation skipping tax exemptions, keeping life insurance proceeds out of the estate, and making sure that any amount passing to a so-called “QTIP” trust qualifies for the unlimited marital deduction.

The other estate planning component, which in many estates is far more important than the tax component, is the practical, or non-tax, component. The practical component includes such decisions as when automatic (i.e., mandatory) distributions of trust property are made to beneficiaries of the estate, who to name as trustee of the children’s inheritances, and whether direct bequests should be made to grandchildren. All too often, less attention is paid to this practical side of estate planning than is paid to the tax side of estate planning. Why is this? Probably because the failure to accomplish proper tax planning translates neatly into a hard dollar cost, whereas the failure to address practical considerations carries with it only an intangible cost. But is the emphasis on tax planning appropriate? In most cases, no. While it is obviously important to plan in the most tax efficient fashion, it is equally important (in most cases, more important) to make sure the estate is used in the desired fashion. After all, if Junior squanders his inheritance on fast cars and entertainment instead of using it to pay for college, the wonderful tax planning you implemented won’t mean terribly much.

With that as background, here are a few of the practical issues to consider when structuring your estate plan:

Should Your Spouse Be the Sole Trustee of Your Estate Assets Upon Your Death? Ordinarily, your estate plan will provide that upon your death at least a portion of your estate to be held in trust for the benefit of your spouse, with the remainder passing to your children upon your spouse’s death. In most cases, your spouse will serve as the trustee of that trust. In some cases, however, it may be appropriate to name a co-trustee to serve with your spouse, or not to name your spouse at all. For example, if there are children from prior marriages on both sides, do you want to take the risk that your spouse will use his or her position as trustee to divert the inheritance you intended to go to your children? If your spouse is a spendthrift, an independent trustee may help to ensure that he or she will not go through the trust too rapidly.

Should Your Children From a Prior Marriage Inherit Upon Your Death, or Only Upon Your Spouse’s Death? Most married couples provide in their estate plans for all of their wealth to be held for the benefit of the survivor of them and pass to children only on the death of the survivor. In some cases, that is not appropriate. For example, if you have children from a prior marriage and your second spouse is fifteen years younger than you and lives a long life, the receipt of an inheritance upon your spouse’s death will do little to benefit your children, as they will be in the last years of their lives at that time. In this situation, you should consider whether a portion of the estate should pass directly to your children at the time of your death.

How Should The Estate Be Divided When You and Your Spouse Both are Deceased? Most people treat their children “equally” in their estate plans. Whether that is appropriate raises philosophical questions that only you can answer. For example, if one child has children and the other does not, do you divide the estate into equal shares or do you adjust the shares such that that first child’s inheritance will buy the same lifestyle for that child and his or her children as the second child’s inheritance will buy for a single person? Is it appropriate to have wealth pass directly to your grandchildren, or should the wealth pass entirely to your children on the theory that they are in the best position to determine what is best for your grandchildren? There are no right or wrong answers to these questions.

When and Under What Circumstances Should the Children’s Inheritances Be Paid Out to Them? Many estate plans provide for the distribution of each child’s inheritance to that child in increments at specified ages, such that the child has received his or her entire inheritance by age forty. There are strong, in many cases, compelling, reasons not to structure your estate plan in this manner. If your child’s inheritance is held in trust, it is there when he or she needs it. If the inheritance is distributed to the child, it can be lost to the child’s irresponsibility, a creditor, or a divorcing spouse. Although there are disadvantages to leaving a child’s inheritance in trust indefinitely (ongoing trustee fees for example), in many situations those disadvantages are far outweighed by the advantages.

Who Should Serve as Trustee? Do you want an individual to serve as trustee, or would your beneficiaries be better served if you chose an institutional trustee. Each choice has its advantages and disadvantages. For example, an individual trustee, especially a relative, may be better suited to making decisions regarding distributions to the beneficiaries. An institutional trustee may be more reliable in terms of administrative matters and may be better suited to managing the investments of the trust. An institutional trustee, however, may be rigid in its decision making and typically will charge significantly higher fees than an individual.

What Limits Should Be Placed on the Trustee’s Discretion? Ideally, the person you name to serve as trustee will be one whose honesty is beyond reproach, who is a brilliant investor, and who would do exactly as you would wish in determining whether and when to make distributions to your children. However, we don’t live in a perfect world. Thus, you need to consider whether you want the trust agreement to force the trustee to make decisions consistent with your intent. For example, do you want to limit the amount that can be made available to a child for investment in a business? Do you want to limit the types of investments into which the trustee may enter? Do you want to preclude the trustee from opening a margin account?

Who Should Inherit in The Event of a Common Disaster? Who will inherit if you, your spouse and all your descendants are wiped out? Although the likelihood of this situation arising hopefully is remote, it does happen. You should consider whether there are friends, relatives, or charities who you especially would want to inherit from you in this situation.

Obviously, these are not the only practical issues you will want to consider when creating your estate plan. The important point to remember is not to get lost in the tax planning. It’s important, but there’s more to a good estate plan than tax avoidance.

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This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.