General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 2
ESTATE AND FINANCIAL PLANNING
DEFENSIVE STRATEGIES FOR POTENTIAL WILL AND TRUST CONTESTS
BY LOUIS S. HARRISON
Estate planners often must represent clients in creating plans that appear destined to result in a challenge. This article provides an overview of strategies to protect a planner and his or her clients and their wishes against those challenges.
Understanding Existing Obligations. A planner should examine existing obligations under a divorce agreement for two reasons. First, the current husband and wife need to ensure liquidity and specifically allocate assets to satisfy those obligations. Second, the agreements provide estate tax planning opportunities. Specifically, payments to a former spouse required under a divorce agreement constitute deductions for estate tax purposes. Less certain are payments to the children of a prior marriage. Ordinarily, these payments are not deductible because the children are the natural objects of a parent's bounty. Payments to minor children in discharge of support obligations, however, could be deductible under section 2053(a)(2) of the Internal Revenue Code.
Balancing Competing Interests. If there are children from a prior marriage, a parent must decide what portion of the estate should go to that person's current spouse and what portion should go to the children from the prior marriage. Different considerations come into play depending on whether the children are minors or adults.
If the children are adults and the parent has a good relationship with them, the parent should consider telling the children what they are to receive under the estate plan. The planner and client should discuss the possibility of a premortem family conference of the kind that is discussed later in this article. If adult children do not have a good relationship with the parent, the issue becomes whether the parent is going to bequeath anything to those children. It may not be a winning strategy for a parent to leave a minuscule amount, accompanied by a certain level of vicissitude. If the client is making a more substantial bequest, then the bequest should be made with no editorializing and accompanied by an in terrorem clause.
The intended result of an in terorem clause may not be available for minor children. A minor will be represented by either a guardian or personal fiduciary. The concept of creating a sword and a shield with a bequest and the in terrorem clause may not act as a disincentive to challenging the will or trust. The personal fiduciary may regard it as his or her obligation to make the challenge. Trusts then become the vehicle of choice. The planner and client should consider leaving the funds to minor children in trust, with specific directions concerning the use of the funds.
Estate Tax Burden. A planner and his or her client should understand the burden of estate taxes and set it forth in the document. Taxes can be allocated against those beneficiaries who caused the tax, or taxes can be allocated pro rata among all beneficiaries. The spousal amount can be a determined amount, without any burden to pay estate taxes. It can be a specific sum or a specific fraction of the estate. The other possibility is to indicate that the spousal share should be burdened with taxes. An interrelated computation is necessary to determine the spousal share in a taxable situation. Ultimately, if a spouse is left a percentage of the estate, the spouse will receive less than a percentage of the gross amount.
Spousal Bequests. In a second marriage situation, there is an incentive to leave funds in trust for the surviving spouse's benefit. At the spouse's death, the assets can pass to children from the former marriage as well as children from the current marriage. This structure is most often achieved in the QTIP context. The terms of the trust must provide that the surviving spouse receive all accounting income at least annually. Distribution of principal to the spouse is an option. The standard can be either narrow or broad. The expansive standard can be used if the surviving spouse is not the trustee. If the surviving spouse is the trustee, there are tax and nontax reasons for not using an expansive standard. An expansive standard could create estate tax inclusion for the non-QTIP part when only a partial QTIP election is made. From a nonstax perspective, the surviving spouse could have enough control over a broad standard to terminate the trust by making a distribution to himself or herself. A distribution in this fashion would frustrate the decedent's intent that some corpus pass to the children. The ability of a third-party trustee to make a principal distribution for the surviving spouse's benefit under a broad standard is a workable strategy.
Estate and Gift Tax Techniques. An interesting combination of estate and gift tax savings plus prevention against a will or trust challenge involves the use of sophisticated techniques such as family limited partnerships, qualified personal residence trusts, grantor retained annuity trusts, and sales to grantor trusts. Lifetime gifting techniques serve multiple purposes, and planners and their clients should consider them as will or trust contest shields. Transfers during life are less likely to be challenged postmortem than are property transfers under the terms of a will or a living trust. First, if the lifetime transfer technique is effective, the asset will not be in the grantor's estate at death. The testator does not own gifted property at the date of death. It is hard for one challenging a will to bring that property back. The challenger may not even know that the asset exists. Second, there may be a different challenge to recover an asset given during life than the challenge that forms the basis of a will or trust contest. Third, invalidating gift transfers will often have negative estate tax consequences, yielding less money to the proponents of the challenge.
How to Disinherit Beneficiaries. To avoid a claim of a pretermitted child, the testator should mention all of his or her children by name, as well as their birth dates, the names of their spouses and children, and their residences to show that the testator knew the natural objects of his or her bounty and was not mistaken about the existence of a child. Practitioners should encourage clients not to punish disinherited heirs by stating the reasons for disinheriting them. Another provision to avoid is the nominal bequest as leaving a minimal bequest to one who is not an heir might give that person standing to bring a contest.
The Premortem Conference. The goals to be achieved by the premortem conference include: the elimination of surprises to the beneficiaries and consequent malpractice and other challenges to the drafting lawyer; an understanding by the family members of what is intended by the estate plan; continuity between the estate planning practitioner and family members in an effort to ensure coordination of objectives after the testator's death; a coordination of the estate planning objectives between both senior and junior family members; an understanding by senior members of what junior family members may really desire; and an increased client awareness and attention to the importance of estate planning. The planner should prepare a written agenda listing the items to be discussed, which the clients should review and approve.
Documentation, Implementation, Capacity, and Execution. Counsel should make clients aware beforehand of the mechanics of the execution of the will and the extent of the witnesses' role. The predominant statutory requirement is that the testator declare to the witnesses that the document is his or her will. The more that clients are willing to discuss their assets and the dispositions of those assets, the greater the value of the attesting witnesses in a contest. Before the execution, it is helpful for counsel to explain to the attesting witnesses the elements of testamentary capacity. Having the testator handwrite the date, time, and place of execution on the will, rather than having these items typed, could evidence the testator's understanding of the time and place of signing.
A lawyer who anticipates a possible contest must act ethically and thoughtfully during and after the planning and execution of the dispositive instruments. The lawyer will be a central, if not the key witness in a contest. Missing documents may give rise to claims of deliberate destruction of unfavorable evidence. Care should be taken to preserve all documents, including the client's financial and medical information.
Louis S. Harrison is a partner with Lord, Bissel & Brook in Chicago, Illinois, and is a member of the Probate and Trust Division's Postmortem Transfer Tax Planning and Technology and Economics Committees.
For more Information About the Real property, Probate and Trust Law Section
- This article is an abridged and edited version of one that originally appeared on page 6 of Probate & Property, November/December 1999 (13:6).
- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.
- Website: www.abanet.org/rppt/.
- Periodicals: Probate & Property, bimonthly magazine; Real Property, Probate and Trust Journal, quarterly journal.
- Books and Other Recent Publications: S Corporations and Life Insurance, 2d ed.; The Irrevocable Life Insurance Trust, 2d ed.; Federal Income Taxation of Life Insurance, 2d ed.; The Lawyer's Guide to Insurance; How to Build and Manage an Estates Practice; An Estate Planner's Guide to Qualified Retirement Plan Benefits, 2d ed.; Accessibility under the Americans with Disabilities Act and Other Laws; Land Surveys; A State-by-State Guide to Construction and Design Law; Environmental Aspects of Real Estate Transactions, 2d ed.; Consensual Transfers of Distressed Real Estate and Land Use Regulation.