Articles Posted in Living Trusts


As this blog discussed in the recent past, dynasty trusts are trusts that allow for a benefactor to pass wealth on to future generations via various legal mechanisms that allow a trust to carry on for literally hundreds of years, overcoming the traditional rule against perpetuities that limited trusts to a life in being plus 20 years, thereby ending the legal life of a trust essentially at about 90 to 100 years.  In March, 2016 President Obama submitted a proposed budget that includes a provision that would effectively eliminate these state trusts at about 90 years.

Every year, the Department of Treasury prints what is called a green book which outlines proposals, which, among other things, contains suggestions that the presidential administration believes are needed and appropriate changes to the law, policy or other regulatory and legal matters.  It also contains information regarding exceptions and issues that are unique to dealing with the federal government.  Under President Obama’s proposal, as found in after page 190 in the green book, this would be done by eliminating the generations skipping tax exemption at 90 years from the date of its creation.  


This blog examined the dynasty trust in the past but it is time to reexamine certain aspects of the dynasty trust.  The dynasty trust is a trust designed primarily to avoid the generation skipping transfer tax when a person wants to leave money to their grandchildren or great grandchildren (or even generations beyond that).  Before getting into the nuts and bolts of what a dynasty trust is, it is best to outline some of the basic tax issues inherent in the generation skipping transfer tax.  

Grandfather wants to leave an asset to his son, with the intention that he will leave it to his son and for him to leave it to his son and so on.  Just to make the dollar figures simple, let us assume that it worth $10 million.  For further simplicity, let us also assume that grandfather’s estate already went through the federal (and state) estate tax exemption.  That means that son has to pay the current top estate tax rate of 40%, which means that the asset is no longer worth $10 million.  Instead it is only worth $6 million.  For further simplicity, father’s estate also passed through all of his estate tax exemption, so instead of the asset being worth $6 million when it passes to the grandson, it is now worth $3.6 million in light of the 40% estate tax.  And the process goes on and on.  


Supreme Court Justice Potter Stewart wrote in an opinion on a first amendment, free speech issue that became famous, but is so commonplace and true about life. Specifically he said that some things are hard to define, but he would know he if he saw it. That same sentiment holds true for so many things in life and the law. Many times certain phrases, concepts or principles can be reduced to a canned or trite definition but still better expressed as the kind of thing that you know it when you see it. The principle of undue influence of a testator creating or amending a will is the type thing that could best be defined as such. For certain courts and legislatures created any number of definitions, but life has a way of finding another set of circumstances that do not fit any such definition but is undue influence just the same. Indeed New York state’s standard jury instructions on the issue of undue influence and duress comes from a case that specifically states that undue influence is difficult to define. Despite the limitations, a good working definition is when the testator was unable to exercise independent action and the person exercising the influence made the person do something against their free will and desire. Charm, ties of affection and past kind acts are not enough. Instead the actor must engage in an act of coercion to make the actor do what they would not otherwise do. Some Courts even broke the definition of undue influence down even further, by stating that it can even be found when a testator believes what the influencer wants them to believe, without even knowing that the influencer asserted their will over them.

There are certain hallmarks that are common with issues of undue influence.


A person is entitled to gift up to $14,000 per year without incurring any gift tax liability. There are some limitations to those gifts, however. The gift must be for the unlimited, present usage of the interest that is being conveyed. That creates problems for when someone wants to convey up to $14,000 per year to a minor but not have the same money handed over to the minor in its entirety when the minor reaches the age of 21. Gift tax liability is controlled by 26 U.S.C. § 2503. 2503(b) states that in order to qualify for the gift tax exclusion the giftor (person giving the gift) must convey a present interest. Subsection (c) states that if the recipient is a minor, the giftor can put the money into a trust that will convey the money to the minor when they are 21 years old and it will still be considered a present interest for purposes of gift tax liability. So, if you want to give $14,000 to a trust for a minor, with the intention that the minor not withdrawal all of the monies accumulated when they reach 21, so that they may obtain the benefit of compound interest and allow the $14,000 to grow even more, the Crummey trust is the right tool.

While the Crummey trust may have a strange sounding name, it comes from the name of the person who first created such trust, D. Clifford Crummey, and the resulting Tax Court opinion of 1966. It works by gifting a certain sum of money to a trust as a gift, with the right of immediate withdrawal from the trust by the recipient, with the expectation that the recipient will not withdrawal the money or liquidate the asset from the trust. The law recognizes the right to immediate withdrawal, not actual realization of the present interest as satisfying the present interest requirement under 2503. This right of withdrawal for a limited period of time is called the Crummey power. In 1999, the IRS issued a letter ruling on the Crummey trust and outlined the four criteria to qualify as a Crummey trust.


Recently this blog touched on some of the issues related to leaving an individual retirement account to your heirs in a will, as found here. There are many options that people have to leave their IRA to others in a will. If you are leaving your IRA to heirs in your will but want to also put some protections in place regarding that IRA, leaving the IRA to a trust may be the best option. You may want to leave the IRA to a minor or to insure that the benefits of your IRA are not able to be attached by creditors. Even if your intended heir is not in need of spendthrift protections, there may still be a need to protect the IRA (and other money or property in the will) from creditors of the heir just the same.

While inherited property is generally excluded from equitable distribution in a divorce, it can still be considered income for purposes of alimony. Certain protections in the form of allowing a trustee to cut off the flow of money from the trust will insure that the beneficiary will not have to worry about this issue. Trusts are very flexible, which can allow you to build certain protections into the trust, such as choosing the trustee and giving them a free hand on distributions. If you leave the money to your heir in a will, unless the heir is a minor, in which case you will likely leave the money to a guardian, you have limited ability to insure that there will be protections put into place, since a will passes property or money outright, while a trust insures that there will be rules in place to protect the distribution of that money or liquidation of the property.


This blog explored the topic of gun trusts in the past and it is high time to reexamine the matter in some more detail. While it is probably true that most people with a fairly sizable gun collection are hunters and gun enthusiasts, that is certainly not the only class of firearm collectors. History buffs and historical reenactors collect also amass a large collection of firearms. They often loan these items to museums or traveling exhibits rather than use them for hunting or skeet or target shooting.

Many times these rifles hold a lot of sentimental value as it may have been through the Battle of the Bulge or Iwo Jima or have some similar family value. Possessing a firearm, whether it is a historical piece from the Revolutionary War or a hunting rifle, can be a federal as well as a state felony if the transfer is not properly documented or held by a certain class of individuals. In either event, however, the government creates laws regulating the transfer and ownership of firearms. New York has the New York Secure Ammunition and Firearms Enforcement Act (NY SAFE Act), while the federal government has the US Gun Control Act as well as the National Firearms Act, which is actually part of the tax code.


Estate planning is the legal strategy by which one generation transfers wealth to the next, which involves an the use of various trusts and/or a will or even transferring money or items to corporations in an effort to legally and ethically reduce tax liability. One of the easiest ways to insure that your children, grandchildren or loved ones who have not yet graduated from high school have a much easier ride in life is to have them graduate from college.

College graduates almost uniformly enjoy a longer life, better health, live in safer neighborhoods and make more money than those who did not graduate from college. There is a hitch, however, in that college is an extremely expensive undertaking. College graduates can be saddled with debt that can follow them for decades. As such, if you can find a way for them to go to college and graduate with no debt or at least minimal debt, you will ensure that you transferred more wealth to them than even the average wealthy parent can leave via traditional estate planning. Many people are aware of 529 plans, which allows for deposits into an account, wherein the money grows tax free and is non-taxable when withdrawn if used for educational costs.


If you are a real estate investor a land trust may be beneficial for you for several reasons. A land trust helps your business and serves as an estate planning tool. First, it helps you keep your real estate investments from becoming public knowledge. If you are the beneficiary of a land trust, your name is not listed as the landowner on the deed, instead the land trust trustee’s name along with certain identifying information are listed on the deed. If you are a celebrity or just reclusive in general this may suit you. Certainly the full extent of your worth and a list or accounting of your assets is potentially something that a seller may want to know when negotiating the sale of certain real estate.

In addition, a land trust helps to potentially shield you from liability connected with the land. For example, if you own a commercial building where a slip and fall occur, the victim of that slip and fall will seek to sue the owner of the building. More specifically, they will sue the trust, which will only be able to satisfy the judgment out of the assets contained in the trust. If you have only one real estate asset in the trust, liability is limited. There will be insurance which will satisfy the judgment, if the judgment is in excess of the insurance coverage, the victim likely can only go after asset. For these reasons alone, real estate investors should find land trusts as a good investment vehicle.


This blog previously discussed the Supreme Court case of Clark v. Rameker and the legal implications of money remaining in an IRA at death, that is in turn left to the heirs of an estate. Putting aside the potential tax implications, if any, with passing on an account with an easily ascertainable value, passing on an IRA can strip the IRA of its legal protections, such keeping it from the reach of judgment creditors. It should be noted that this discussion does not include leaving money in an IRA to a spouse, which the law allows special treatment for, by allowing the spouse to roll it over into a regular IRA account upon the death of the owner of the IRA and treat it as if it were his/her own IRA.

With respect to all other types of heirs, with an inherited IRA, the owner can withdraw from the IRA prior to reaching the age of 59 and one half years old. If the IRA is not inherited the owner would normally face a ten percent penalty if did this. In addition, the owner of an inherited IRA must withdraw the entire balance within five years of the original owner’s passing or take annual minimum distributions, allowing the bulk of the money to sit in the account and grow tax free. The money is only taxed to the recipient upon withdrawal. Most importantly, the owner cannot add funds to the IRA account. To maintain certain protections, such as keeping the money in the IRA out of the hands of judgment creditors and to minimize the tax liability, it may be wise for the testator to leave the money in the IRA to an IRA trust or conduit trust.


Sometimes when a person creates a trust they do not know all of the material facts, indeed cannot know all of the material facts regarding what is in the beneficiary’s best interest. Perhaps the trust expressly states that the beneficiaries cannot receive payment from the trust until they reaches 25. What happens if one of the beneficiaries is diagnosed with a medical condition with treatment that is not covered by his/her health insurance? Surely it would seem appropriate to allow the trustee or the beneficiaries to modify the terms of the trust. Situations such as these have always been an issue since the creation of trusts and Courts have dealt with this issue, with reported opinions going back centuries. One famous case that allowed for the beneficiaries to reform or modify a trust, Saunders v. Vautier, came out of England in 1841.

The principles outlined in the case helped to dictate the common law throughout Anglo-American law, namely that as long as the beneficiaries are all of the age of majority and not under legal disability a Court should allow a party to modify the terms of a trust. But unfortunately life is so much more complicated than that. Look at the tragedy of Bobbi Kristina Houston. Following Whitney Houston’s passing, her daughter (Bobbi) stood to inherit her estate in stages with the first disbursement of approximately eight million dollars at the age of 21. Bobbi’s grandmother Cissy Houston and aunt Marion Houston both sought to reform the terms of the trust granting Bobby Houston such sums, arguing that she, the beneficiary, would be at heightened and unacceptable risk of undue influence of third parties. When there is an allegation of undue influence, it is often the case that the trustor or settlor is alleged to have been under undue influence, not the beneficiary that may fall prey to undue influence. The need to reform a trust may have more mundane reasons such as mistake. Take the not uncommon example of a trust created in a will, called a testamentary trust, of a husband and wife, who, other than their names and other identifying information, have identical wills. At the signing of the wills by the parties, they mistakenly sign each other’s will and not their own.

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