By Marc S. Bekerman and Gerry W. Beyer
As the world prepares to enter the next millennium, the practice of trusts and estates law continues to evolve. Factors driving this
evolution include an increase in life expectancy, numerous advances in medical technology, the increased geographic mobility of individuals, the growing use of revocable trusts as will substitutes, the trend to abolish the rule against perpetuities and restrictions on the ability of creditors to reach self-settled trusts. Due to advances ranging from low-tech improvements, such as refrigeration and sewer systems, to sophisticated medical procedures, such as organ transplantation and dialysis, people are living longer than their ancestors. This article examines some of these trends as well as other patterns that will affect trusts and estates law practices in the near and distant future.
Many retirees currently receive a combination of social security, including Medicare, and payments from company sponsored pension plans or IRAs. Increased life spans force clients to make these benefits and their savings last over a longer period of time.
Because retirees will have an increased need for liquid assets and a stream of guaranteed payments over an extended period of time, they will likely increase their use of reverse mortgages and annuities and, for the charitably inclined, charitable remainder trusts. The elderly may demand advances of their life insurance benefits to use during their lifetimes, similar to accelerated ben-efits provisions for terminally ill insureds that many life insurers offer.
Many commentators debate whether the social security system can survive over the next century due to the projected growth in the number of payees along with fewer contributors. Dire predictions about social security have triggered an increased awareness of the need to save by those people who may receive little to no social security benefits on their retirement. This awareness has led to an increase in the vehicles available for saving.
Many lawyers are familiar with the traditional IRA and pension plans and the trusts and estates issues they raise. Congress will likely increase
the threshold level for deductibility of IRA contributions. In fact, Congress started down this path with the Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 788 (TRA 97). TRA 97 also introduced two new kinds of IRAs, the Roth IRA and the Education IRA.
The Education IRA is a vehicle by which clients can save for education in a tax-advantaged manner. The primary drawback of the Education IRA is the relatively small amount that a client can contribute on an annual basis.
In contrast, the Roth IRA is one of the more exciting concepts to find its way into the Code in recent years. A Roth IRA owner cannot deduct contributions to the Roth IRA. The future appreciation within the Roth IRA, however, is not subject to income tax on a current basis, and all qualified withdrawals are free from income tax. In addition, with its fairly high adjusted gross income ceiling for participation, the Roth IRA is available to most taxpayers. Finally, the Roth IRA has some additional advantages over traditional IRAs, such as not being subject to minimum distribution rules during the owner's lifetime.
The Roth IRA will not mean the end of the traditional IRA, which will continue to be a savings vehicle for those taxpayers who either are ineligible to use a Roth IRA or determine that the traditional IRA is preferable for other reasons. For instance, a person close to retirement who does not wish to accelerate the income tax due may find a traditional IRA more appealing. In the future, though, it is likely that the only people who will use traditional IRAs will be those with incomes too high to be eligible for Roth IRAs.
Estate planning lawyers have focused on the Roth IRA as a means to transfer wealth to the next generation. In this context, the obvious advantage of a Roth IRA is that no income tax is due on the owner's death, although the owner's gross estate will include the value of Roth IRA assets. During the owner's lifetime, the Roth IRA is not subject to the minimum distribution rules. These rules, however, apply following the owner's death.
The primary problem with the Roth IRA as a wealth transfer vehicle is that its income ceiling effectively prevents wealthy people from using it. With the increase in the federal estate and gift tax unified credit, discussed below, a person will eventually be able to pass $1 million free of transfer taxes ($2 million if married and the couple undertakes appropriate planning). Most clients in need of estate tax planning beyond a credit shelter trust are likely to find themselves ineligible for the Roth IRA.
Nevertheless, due to the tax-advantaged nature of the Roth IRA, persons with significant wealth should take steps to ensure that their children establish and contribute to their own Roth IRAs. Although there is an earned income requirement to contribute to a Roth IRA, clients can meet this requirement with a minimal amount of planning.
Physical and Mental Health Issues
Incapacity. As people live longer, the number of individuals exhibiting some signs of senile dementia will continue to increase. The percentage of persons of a particular age with mental problems may actually decrease, but because of the aging population, the raw number of afflicted individ-uals will increase. Persons who show symptoms of decreased mental functioning often require assistance to meet both their personal and property needs. Consequently, the use of revocable trusts and durable powers of attorney will continue to increase because of their utility in the management of
a person's property on incapacity. The use of living wills and health care proxies will also increase, given their similar utility in managing a person's health care needs. As advances occur in medicine and technology, a client should continually review these documents to make sure that they still reflect his or her intent.
Multiple residences. Given the increase in travel and in the number of persons with multiple residences, states may enact uniform forms for powers of attorney, health care proxies and living wills. This would allow a person to execute one set of forms that will be valid regardless of where the client later lives. Currently, clients with multiple residences often need multiple sets of instruments. Indeed, if a model form can be developed that is valid in all jurisdictions, it should take the form of a "super disability planning form" that incorporates in one document a person's wishes for all aspects of disability planning. To encourage its use, the form should permit extensive customization by the user. For example, the portion of the form dealing with property management during disability should permit the principal to select between a springing and immediately effective power of attorney.
Home care/nursing homes. With an increase in the number of persons requiring either home care services or nursing home residence, the question of how to pay for this care becomes a key consideration in disability planning. Long-term care insurance may become more popular in light of the fact that an extended nursing home stay could exhaust a person's assets. Long-term care insurance, however, raises some difficult issues, including determining the proper amount of coverage, the terms of the policy (especially the requirements to qualify for benefits), the premiums and the potential that the client will pay substantial premiums but never receive any benefits.
Of course, there is the possibility that Congress will enact some type of national health insurance or that Medicare and Medicaid will remain possible sources of payment for health care. The political nature of these issues, however, means that lawyers cannot rely on the existence or amount of these benefits when advising clients.
Many clients have already switched from wills to revocable trusts and pour over wills as the primary revocable documents in their estate plans. Lawyers and their clients have traditionally preferred revocable trusts because they avoided the delay and expenses associated with probate in certain jurisdictions. Revocable trusts also facilitate property management if the client becomes incompetent. As a result, even clients living in states that do not have time-consuming or costly probate procedures now regularly use revocable trusts. The federal tax treatment of estates using revocable trusts and pour over wills became similar to probate estates after TRA 97, on an elective basis. Accordingly, it is likely that the use of revocable trusts will continue in the future.
This increased use of revocable trusts should prompt state legislatures to treat estates passing by revocable trusts similarly to estates passing by wills. There currently are situations in which the treatment of wills and revocable trusts diverge. For example, in some states the right to a jury trial exists in a traditional probate contest but not in a proceeding to set aside a trust, which is an equitable action. This trend has already begun; many states have changed their laws to equalize the treatment of revocable trusts and wills.
More Uniform State Rules
As noted above, Americans travel more frequently now and often maintain more than one residence. In the future, states may adopt more uniform laws and procedures concerning wills, estates, trusts and disability planning. Some advantages to the adoption of uniform rules include standard document execution rules (e.g., treatment of holographic wills, the number of required witnesses and requirements of self-proving affidavits) and easier ancillary administration. Uniform rules may also ease estate administration as discussed below.
Antemortem probate permits a testator to commence a proceeding in a court of competent jurisdiction to determine the validity of his or her will before death. Three states, Arkansas, North Dakota and Ohio, currently allow such a procedure. Ark. Code Ann. § 28-40-201-203; N.D. Cent. Code §§ 30.1-08.1-01-04; Ohio Rev. Code Ann. §§ 2107.081-.085.
At first glance, the adoption of antemortem probate would appear to deter will contests, thus ensuring that the testator's desires are effectuated. In particular, antemortem probate allows the litigation of issues of capacity, fraud and undue influence while the most important witness, the testator, is still alive. Antemortem probate also allows a family to avoid a postmortem will contest. This lessens the need to resort to revocable trusts. In many states, a person must have a higher degree of capacity to create a revocable trust than is needed for a traditional will. Antemortem probate, however, raises many issues, including the appropriate type of notice to be given to persons adversely affected by the will; whether the decree binds heirs or beneficiaries of prior wills who did not have notice; and how many times a testator should be allowed to bring another proceeding if the testator's attempt at antemortem probate fails.
Estate and Gift Tax Reform
The future will likely see all states finally adopting a death tax equal to the amount of the state death tax credit available under Code § 2014. With all of the proposals in Congress for additional increases to the unified credit and "targeted" tax benefits, perhaps the better question at this point is whether the federal estate and gift tax will survive into the next century.
The federal government could completely repeal the estate and gift tax. Many legislators have introduced bills to do exactly that. As revenue conscious as Congress is, however, it probably will not totally repeal the estate and gift tax system in the near future. Nevertheless, Congress could "partially" repeal the estate and gift tax by further increasing the unified credit over and above the increases set forth in TRA 97, by adding additional exclusions and deductions or by implementing some combination of those proposals.
Congress could also change the federal death tax from a tax based on the size of the gross estate to a tax based on the identity of the decedent's beneficiaries, like some state's inheritance taxes. This type of death tax would provide for different tax rates based on the nature of the recipient (e.g., a charity) and the beneficiary's relationship to the decedent. For example, the government would exempt gifts to spouses but would tax transfers to children, although at a lower rate than transfers to more distant relatives. The government could, in turn, tax transfers to more distant relatives at a rate lower than the rate on transfers to persons with no familial relation. On the other hand, the Constitution's prohibition on direct taxation will prevent Congress from imposing a true inheritance tax that taxes a donee on the receipt of an inheritance regardless of the residence or status of the decedent, although Congress could subject gifts and inheritances to income taxation.
Modernization of Trust Law
Abolition of the rule against perpetuities. There is a growing trend among state legislatures to abolish the various states' rules against perpetuities, thereby permitting settlers to create perpetual or "dynasty" trusts. A properly prepared dynasty trust can transfer wealth to multiple succeeding generations with a minimal amount of estate, gift and generation-skipping transfer (GST) tax. Given that families with such significant wealth are in the 55% bracket for all transfer taxes, in-cluding the GST tax, the savings possible with a dynasty trust through three or more generations can be substantial.
Creditors' rights. A more recent, and even more controversial, development in the area of trust law is the enforcement of restrictions on the
rights of creditors to reach the assets of an inter vivos trust that a debtor has funded. Some states now enforce spendthrift trust provisions even if the settlor is a discretionary beneficiary of such a trust. These laws allow a client to have many of the asset protection advantages of sending money offshore with much less risk. There is considerable debate as to whether such creditor protection provisions will withstand a constitutional attack by a frustrated creditor on the ground of full faith and credit. It is likely that one or more federal courts will decide this issue. Until the law is clear in this area, more conservative clients will continue to establish offshore asset protection trusts. For a further analysis of these issues, see Douglas J. Blattmachr & Richard W. Hompesch II, Alaska v. Delaware: Heavyweight Competition in New Trust Laws, 12 Prob. & Prop. 33 (Jan./Feb. 1998).
Professional fiduciaries. A related development is the increasing use of professional fiduciaries. Part of this change is due to requirements under the laws of the jurisdictions providing the creditor protection outlined above. These states often require that the trust assets be located in the jurisdiction and that the fiduciary be a bank or trust company based in the jurisdiction. In fact, there are professional fiduciaries that have opened offices in these states specifically because of the anticipated need. Other factors contributing to the increase of professional fiduciaries include the overall increase in wealth of Americans and nontraditional families.
Unitrusts. To avoid the hassle of allocating receipts and expenses between income and principal, as well as to reduce the inherent conflict
of interest between current and future trust beneficiaries in investment decisions, an increasing number of trusts will be unitrusts. The current beneficiary of a unitrust receives a fixed percentage of the value of the trust property annually. The current beneficiary may or may not also be entitled to additional distributions. For example, the trust could provide:
Trustee shall distribute 5% of the value of the trust property to Current Beneficiary on the first of every year. Trustee has the discretion to make additional distributions to Current Beneficiary for Current Beneficiary's health, education and support. On Current Beneficiary's death, Trustee shall deliver all remaining trust property to Remainder Beneficiary.
Under a unitrust, both current and future beneficiaries have the same goal_they want the value of the property in the trust to increase. It does not matter to them whether the increase in value is due to receipts traditionally designated as income (e.g., interest or rent) or principal (i.e., realized gains). Rather, the trustee can invest for total return. All increases inure to the benefit of all beneficiaries. Likewise, all beneficiaries share in the expenses regardless of their characterization as income or principal charges.
Multiple marriages. American views on marriage have undergone tremendous changes over the past 25 to 50 years. Although multiple marriages were formerly the exception, they are becoming more and more common for a variety of reasons that range from a higher divorce rate to longer life spans for surviving spouses.
Estate planning for clients who have been married more than once and have children from prior marriages raises thorny issues related to the method of distributing property to the surviving spouse and the children. The difficulties lie primarily with tax rules and the possibility that the surviving spouse will not provide for the stepchildren in his or her estate plan. Often a QTIP trust under Code § 2056(b)(7) can solve these issues because it preserves the marital deduction and allows the decedent's children from a prior marriage to receive the property when the spouse dies. QTIP trusts, however, can present complications ranging from selection of the trustees and the discretion of the trustees to invade principal to the investment policies of the trust, partic-ularly balancing future growth and current income.
Same sex marriages. Current laws treat married couples differently from couples who are not married. Although opposite sex couples may choose whether or not to marry, no U.S. jurisdiction permits same sex marriage. If one state allows same sex marriages, then same sex couples should be able to marry under the laws of that jurisdiction and have the marriage recognized under the laws of their home state. Although a state or even the federal government could pass a law providing that a state need not recognize these marriages, that law might conflict with the full faith and credit clause of the Constitution.
Assuming that states eventually allow same sex marriages, same sex couples will receive the same treatment as opposite sex couples in many areas, including financial issues (e.g., income taxes and gift taxes) and benefits issues (e.g., health insurance) during the decedent's lifetime. The more important equalization will arise at death with issues such as the status of the surviving partner as an heir or distributee under state intestacy law (which also affects who can contest the transfer of property to the surviving spouse) and treatment of bequests to the partner for estate tax purposes.
"Afterdeath" children. Technology currently allows individuals to "save" sperm, eggs and embryos until well after the death of the donor of the genetic materials. By these artificial means, both male and female decedents can have children conceived after their deaths. How will society treat these afterdeath children? Al-though there is definitely an issue of fairness to these children, the property system demands certainty at some point. State legislatures may decide that these children do not have any rights in the estates of the suppliers of the genetic material but only in the estates of their birth parents (that is, the mother who physically gave birth to the child and her spouse, if she has one). Of course, such a system will raise other issues, such as the rights of a child who is born to a surrogate mother.
The complexity and expense of estate administration varies not only from estate to estate, but also from state to state. Some states have simple rules concerning the administration of an estate or even permit unsupervised administration. Other states have stringent requirements, such as bonding, accountings and lengthy procedures before a personal representative can sell estate assets.
In the future, states will likely simplify estate administration through the use of unsupervised administration and abbreviated or "short form" methods for administering small estates. The current definitions of a "small estate" for informal appointment purposes vary greatly. These amounts are likely to increase. This trend has already started. For example, California now defines a "small" estate as an estate with assets of less than $100,000. Cal. Prob. Code § 13100.
Generally, the small estate definition only applies to the decedent's probate estate. The definition of a small estate, however, affects the administration of an estate when the decedent has various nontestamentary assets, such as revocable trusts, multiple-party accounts, assets with designated beneficiaries and assets held in joint tenancy with right of survivorship. For example, if a decedent placed the bulk of his or her assets in a revocable trust, those assets that pass under the pour over will could be administered quickly and easily if the value of those assets is less than the applicable small estate limitation. A higher figure to define a small estate increases the ease with which this kind of a large estate can be administered if most assets pass
outside of probate.
The trend toward greater use of nontestamentary assets will continue, particularly the use of revocable trusts. Lawyers, however, must exercise care in drafting testamentary instruments in light of the increased use of nontestamentary assets, especially clauses apportioning death taxes. Furthermore, all states should uniformly treat a designation of property being held jointly without additional survivorship language. Currently, some states presume survivorship and others presume no survivorship, a situation that causes significant problems.
This article has summarized some of the changes to the practice of estate planning that may occur in the new millennium. Only time will tell whether these changes actually come to pass, but by observing trends in the law, trusts and estates lawyers can identify issues that may concern their clients and be alert to changes that may affect their clients.
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