This article concludes a two-part article. In Part I, which appeared in the previous issue, the following major points were made:

•           Although some estate plans fail because of tax errors and poor drafting, others miss the mark because of design errors or people mistakes. The QTIP Trust an estate planner drafts may be technically perfect, but it may also be the wrong kind of marital transfer under the applicable facts. The planning strategy that maximizes tax savings can hardly be deemed a success if it directly promotes major family discord. During the planning process, the drafter wants to produce technically excellent documents, but he or she also wants to avoid big picture mistakes. Discussing subjects like those discussed in this article at the all-important planning conference may result in plans that work better in the long run.

•           A potential danger exists when parents leave a complicated asset (e.g., an expensive beach house or family business) jointly to the children or when the parents’ plans require their offspring to do a challenging job together, such as administering a complicated estate or serving as trustees of a family foundation. When the suggestion is made to put the “Children in a Rowboat,” the advisor needs to help the client evaluate whether this plan is likely to become a divisive factor for the legatees and, if so, to develop ideas to help the children deal with a problem if one develops.

•           The estate planning professional has an obligation to make sure that the client understands the full consequences of directing that most of the marital bequest be held in QTIP form, or in other words the consequences of creating an “Overstuffed QTIP.”

•           Even the best-designed estate plan can become a disaster if the wrong executor or trustee is left in charge. The estate planning professional who merely accepts a client’s suggested lineup of fiduciaries when he suspects a “Clueless Fiduciary” is on the list is not fully carrying out his obligation to the client.

The Client Sans Philosophy

A few years ago, an older couple, friends of mine blessed with $80 million of marketable securities, came into my office to review their old wills. The wife’s opening comment was, “Bob, please tell Joe that we can afford to go to Europe!” That comment suggested to me that the estate planner has a role to play with those he or she counsels that goes far beyond well-drawn wills and clever tax strategies.

Until some point in the 1990s, most of the clients I met with to discuss estate planning knew how their assets needed to be allocated, primarily because it took most or all of their net worth to assure the comfortable support and proper education of family members. But now many people have discretionary wealth; in other words, they can take care of the basics very generously and still have assets to allocate to other goodcauses. Many of these rich people have not accepted the fact that they have discretionary wealth or, when they have done so, they seem stuck in a mindset established before they became rich. They do not think outside the box of spouse and children except for some charitable giving, and that giving is typically modest.

Here is an opportunity for professionals to help make wonderful things happen for clients with discretionary wealth. Begin the process by helping them think about their wealth philosophy, because that will inform the choices they make in designing their estate plans. The specifics of how to do this are challenging. I start with questions like these: How much is enough for your children and grandchildren? What use of your wealth would give you the most pleasure, especially after you have provided for your immediate family? When would you like to get that pleasure—now, soon, or much later? This timing issue is very important because many people have plans that do not give them the pleasure of seeing their wealth at work for the benefit of the children or charities they care about.

This type of discussion should be at the heart of an advisor’s planning effort with the very wealthy. Many clients have not recognized that their plans provide more than they would like their children to have or that the children will get their inheritance at the wrong time, either too soon or too late. I see people who have enormous wealth but do not get nearly enough enjoyment from it. Luxury vacation homes and multiple golf club memberships leave a lot of people asking themselves, “Is this all there is?”

Let’s consider a few examples of the less desirable plans that can result if these wealth philosophy issues are not addressed.

•           Consider the rich lady who, because of her devotion to the symphony, has created a $1 million charitable remainder trust that will provide assets to the symphony following her death. She is very eager to help the symphony get even better. Unfortunately, under her plan, she will never get to hear her money at work. She will be dead before the musicians do any playing on her nickel. Would her plan be more reflective of her real goals if she had made a current outright gift of half a million dollars to the symphony payable over a three-year period? That plan would allow her to see her gift at work, and I guarantee you that the symphony leaders would pay more attention to her under the current gift plan than they would if the symphony merely had the expectation of a future charitable remainder, especially one in which the donor reserved the right to change the charitable beneficiary.

•           This same general point can be applied in a second charitable gift context. Many clients with discretionary wealth have set up charitable foundations for both tax savings and charitable giving purposes. But for some reason—usually the advice of tax counsel!—the minimum distribution amount has turned into a maximum cap. The $1 million foundation translates into an annual distribution of $50,000. This “dribble out” practice suits many people perfectly. But when I raise the question of what the donor wants from the foundation, I sometimes find that the charitable halfway house administered on a dribble-out basis, which the planner calls a private foundation, produces far less joy to the donor than a different plan that includes larger current outright gifts or annual distributions that exceed the minimum requirements. Estate planners go beyond being technical experts when they help clients not only save taxes but also achieve other goals. The challenge is to help clients get the most out of their wealth, and often more tax-savings alone or simply increasing the portfolio of the foundation will not satisfy that goal.

•           Wealthy people create family limited partnerships because they want to pass some of their wealth to their children now. The FLP may one day produce some good tax results for the family, and it may ultimately get some significant assets to the children. But often the partnership is necessarily run in a fashion that gives the children little more than a piece of paper that provides hope of future wealth. Consider the client who establishes an FLP so that limited partnership interests can be used for annual gifting purposes. That allows more to be given because it allows gifts at discounted values. But does a client accomplish the goal of helping the children now by giving them limited partnership interests that cannot be translated into current cash? In cases in which I have questioned using FLP interests for annual gifting purposes, the client has sometimes recognized that the proposed plan does not accomplish all of the client’s goals. I am amazed by the number of smart people whose planning or thinking involves an unintended gap like this. (This “present interest” issue became a gift tax problem for the taxpayers in Hackl v. Commissioner, 118 T.C. No. 14 (2002).)

To summarize, the estate planner’s responsibility is to help the client devise a plan that reflects what the client wants to get out of his or her financial success. When the advisor merely devises a tax-saving plan without looking at bigger issues, he or she is constructing an elevator that never gets to the top floors of the building. Many clients need help in acknowledging the fact that they have substantial wealth and in thinking about how they want to use that wealth in creative and thoughtful ways that may go beyond the standard basics. When the planner helps in this fashion, he or she provides a very valuable professional service to clients.

The “Off-the-Rack” Planner

If estate planning attorneys have a blind spot, it probably is using a standard form to fit all sizes. Certain bank forms appear in estates of all varieties, as though a size 38-regular or a 42-short would fit every individual regardless of size. Some factual circumstances call out for special dispositional provisions. But often the drafter’s only response is a standard form. All of us must resist the temptation to use our own firm forms in too many cases, because the need for tailor-made treatment is not uncommon. Sometimes slight modifications will do the trick; for example, the advisor can include the testator’s parents in the class of permissible appointees, or allow special encroachments to help take care of a child’s stepchild, or permit a surviving spouse to veto the disposition of a certain asset. Although many clients are not willing to pay for designer plans, the advisor should not let that assumption keep him or her from responding to the needs and goals of the specific situation. At a minimum, the sleeves may need to be shortened or the waist let out, and even if there is a bit of extra cost to do so, the planner should offer this kind of service to the client.

The Powerless Trust

I am surprised at the number of long-term trusts I see that have no effective powers of appointment, lifetime or testamentary. The powerless trust that may endure for many years is almost always a mistake. Things do not stay the same: statutes, investment results, family needs, societal norms—they all change. For this reason, the rigid trust often will not work properly over a long period. The power to accommodate change can be vested in the trustee, a beneficiary, or a third party, but it needs to be given to someone. If right now the estate planner knows more about what will work best for all issues in 2025 than a trustee with 20 years of additional facts, then the wrong trustee has been picked. The client may not know how responsible that 15-year old grandchild will be in her 30s, but I would rather take the risk of trusting the grandchild’s judgment about directing assets to his or her children than automatically requiring or prohibiting such distributions. Another great feature of well-drafted powers is that they often allow technical or tax problems that arise in the future to be solved easily and inexpensively.

Moral of the story: beware of powerless trusts unless you think that things never change.

The Unintended Taxpayer

A problem that often causes family members to want to shoot someone arises when one beneficiary gets certain property but somebody else has to pay the estate taxes on that transfer. The testator gives a $500,000 beach house to a daughter and the $1 million residuary estate to two sons. That provides the same amount of inheritance to each of the three children, doesn’t it? Not at all. If the will leaves the payment of estate taxes unaddressed, state law may provide that the daughter gets the beach house without any liability for estate taxes because all estate taxes, even those attributable to the beach house, are paid out of the residue. This means that the sons get substantially less than the daughter, and the sons are sure to believe that dad never intended this result. If family turmoil is to be avoided in situations like this, then the testator and drafter need to address the issue specifically. If the testator intends for taxes on the daughter’s share to be paid by her brothers, it surely helps to have that point adequately covered in the file (or even the will), because the advisor or drafter can then tell the infuriated sons that the disparity in inheritance was clearly intended.

This problem can arise with life insurance, property subject to a general power of appointment, QTIP trusts, property held jointly with right of survivorship, and other nonprobate assets. Who should pay the estate tax on these kinds of assets? Fortunately, the provisions of Code §§ 2206, 2207, 2207A, and 2207B may save the skin of the underperforming advisor by providing that estate taxes generated by certain assets will be payable out of those assets. But that statutory relief does not apply in all cases, including specific bequests under a will, to property held jointly with right of survivorship or to distributions made from IRAs and qualified plan accounts. Whenever the recipients of those assets are not the same as the residuary beneficiaries (who bear the tax burden), the tax advisor must be on high alert to make sure that the tax liability lands in the right place, that is, where the testator intended. The necessary discussion with the client may lead the drafter to provide that the daughter gets the beach house but must pay her pro rata share of the estate taxes. The point is that the client will not think about this issue without his or her advisor’s help, and the plan cannot be drafted properly without the client’s direction. Failure to deal expressly with this issue will likely subject the members of the estate planning team to the wrath of those who are certain that they are “Unintended Taxpayers.”

The Client Who Mistook a Will for an Estate Plan

A few years ago there was a play on Broadway called The Man Who Mistook His Wife for a Hat. I thought of that title when I recalled a fellow I counseled several years ago. Having just sold his company for $40 million, he came to me for his estate planning. This guy was a control freak who wanted his will to determine in detail how the family could deal with his assets for the next 80 years. Three years later when he came back to my office to review his planning, he was shocked when I told him that his will looked fine but controlled little or nothing. A few months earlier he had let his broker put all of his financial assets into a joint tenancy with right of survivorship account. If he died, these assets would pass outright to his surviving wife. I was glad to find my original notes and correspondence, which showed that I had explained the difference in probate and nonprobate assets during the first round of planning, but obviously he had forgotten the point of that discussion.

I see a large number of wills that indicate a disconnection between a client’s will and the client’s assets. It is essential for the good advisor to know how assets are held because only then can the controlling document be determined. What are the probate assets owned by each spouse? Which assets are controlled by beneficiary designations and who has been designated on those forms? Is the jointly held real estate a tenancy in common (which passes as a probate asset) or a joint tenancy with right of survivorship (which passes outside the will)? Although the advisor sends the client a simple form designed to develop that information, many clients bring in the financial form used by banks in making loans; and those bank forms do not generally categorize the assets in a manner that is a prerequisite to good planning.

The more I practice the more I try to help my clients understand this basic point: how assets are titled and how beneficiary forms are completed are very important matters, and changes made after the estate planning project should be discussed with the estate planning advisor. Otherwise the client may end up as the “Client Who Mistook a Will for an Estate Plan.”

The Unnecessary Trustee

When is it necessary to have a nonbeneficiary trustee or a trustee outside the immediate family to accomplish the planning goals? Because most clients long for simplicity and want to keep their affairs within the family household, it is the estate planner’s duty to help accomplish that goal whenever it is possible to do so.

A trust that authorizes discretionary distributions requires a nonbeneficiary trustee (or co-trustee). If a beneficiary is the sole trustee of such a trust, all of the assets will be includable in that beneficiary’s estate. But if the trustee’s powers to make distributions to himself are limited by “ascertainable standards,” as defined in Code § 2041, there are no tax reasons why the beneficiary cannot be the sole trustee of that trust. (This answer assumes that proper technical provisions regarding the discharge of legal obligations and other unintended “general powers” will be included.) The client may not want the beneficiary to be sole trustee for other reasons, but that is a different issue. Some state laws may restrict a beneficiary’s being the sole trustee, but that rule does not apply in many jurisdictions and is ignored in this discussion.

There must be a lot of uncertainty about this basic tax point because so many trusts include an unnecessary trustee. For example, I have often seen wills in which one spouse has named as executor and trustee the other spouse plus a relative who lives in another state. When I have asked why that relative is included, the clients have usually responded that they thought it was necessary to have a trustee who is not a beneficiary. In nine out of ten cases when I have explained that the desired tax goals can be achieved without the nonspouse trustee, the clients have confirmed that they want each other to serve as sole trustee. That decision can make life easier for everyone. This “Unnecessary Trustee” issue also often arises in the context of a minor’s trust when, for example, the beneficiary’s uncle rather than his mom is named as trustee. With proper drafting, and provided the trust is funded solely with dad’s assets, the advisor can help the clients avoid the logistical problems that generally follow when a person outside the immediate family is named as trustee.

In summary, estate planners should not add to the hassles of trust administration for clients by naming a trustee outside the immediate family, unless there is a good tax or nontax reason for doing so. A desire on the advisor’s part to avoid the research or drafting effort required to offer this option to the client doesn’t count!

Conclusion

In no sense has this article exhausted the list of design or nontechnical problems that frequently occur in estate planning, because the full list is much longer. My goal has simply been to spotlight some of the more important problems that may come about even in the context of a will or trust that seems technically perfect on the surface. As you help prepare or merely review the estate plans of your clients, hopefully the results you help them achieve will be better because you have been mindful of the Children in the Rowboat, the Overstuffed QTIP, the Clueless Fiduciary, the Off-the-Rack Planner, the Powerless Trust, the Unintended Taxpayer, the Client Who Mistook a Will for an Estate Plan, and the Unnecessary Trustee.