P R O B A T E   &   P R O P E R T Y
July/August 2004
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Practice Pointers - Probate

Practice Pointers—Probate Editor: Diane Hubbard Kennedy, 4911 E. 56th Street, Indianapolis, IN 46220, d_kennedy@iquest.net.

Practice Pointers offers suggestions for improving estate planning and probate practice. The editors of Probate & Property welcome suggestions and contributions from readers.

 

Recognizing Our Biases

I recently reviewed a charitable remainder trust that had been drafted by an attorney on behalf of a charity he represented. As it happened, the same attorney also represented the bank that was named to serve as trustee. The trust agreement had no provision permitting removal of the trustee. The trust dramatically underperformed and much turmoil ensued. I have worked with this lawyer before and he is generally an excellent attorney. I do not believe that he was intentionally disadvantaging one client to benefit another. I think that he ran afoul of his own biases. After all, for many years it was common (at least in Indiana) for a trust to contain no trustee removal provision. Banks as corporate trustees were stable pillars of the community with few personnel changes. The changing financial landscape has caused most estate planners to add trustee removal provisions, but what other biases are still reflected in an estate planner’s boilerplate? What is the potential effect of these biases on clients?

It is not economically feasible to fully explain every provision in most trust documents to clients. I would like to do so, but (1) clients’ eyes tend to glaze over after a while and (2) most of my clients would resist paying the cost of lawyer time to discuss each item. It is important, however, that estate planners recognize their own biases and discuss the significant ones with their clients. A very common estate plan fully funds the family (credit shelter) trust and distributes the residue to a QTIP trust. Generation-skipping provisions may also be routinely included. I have a notion that most married clients would prefer to leave everything outright to the surviving spouse on the first death, and then outright to adult children on the second death. Maybe that’s my bias.

Addressing Major Issues

I submit that estate planners have a duty to discuss the ramifications of an estate plan as clearly and fairly as possible. Studies have shown that most people will opt for a proposed surgical procedure if they are told that it has a 95% chance of success, but will reject a procedure if it is presented as one with a 5% chance of failure. Clearly, asking the client, “You don’t want your wife’s next husband to get your children’s inheritance, do you?” is much more likely to result in a QTIP than more open-ended questions like, “What is your most important objective in planning your estate?” or “How do you want to provide for your wife on your death?”

Boilerplate

It is the more pedestrian boilerplate that is apt to be overlooked. Is a required asset level specified for corporate trustees? May the trustee terminate a trust if the principal level falls below a specific dollar amount? If so, how were these amounts chosen? Would clients be better served with more flexible language? Under the documents, must corporate trustees be banks? Why or why not? Another area that estate planners may regard as boilerplate but that can have significant monetary implications is the tax allocation clause if there are substantial nonprobate (or nontrust) transfers. Five and five powers is another area that was a common inclusion several years ago, but it seems to be declining as the exemption equivalent amount increases (an inclusion of $75,000 (5% of $1.5 million) could be subjected unnecessarily to a tax of $36,000 if the second death occurred this year). These are probably not items that an estate planner can afford to discuss with each client, but he or she should at least reflect on the choices occasionally to determine whether they still fit.

 

 

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